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Don’t sue banks. It’s a simple policy, and many firms that cater to the financial industry have long followed it. In return for declining the occasional case, top firms were rewarded with a steady stream of transactional, defense, and regulatory work. But with the onset of the credit crunch last August, the financial rationale behind the rule began to falter. Transactional work has slowed, and unlike in previous financial crises, many of the biggest cases won’t pit borrowers against lenders. Instead, they involve alleged misrepresentation in the sale of mortgage-backed securities and related products. Often, banks are on both sides. That means top firms that have shied away from such cases are now considering waiving the rule, though so far, more firms have stuck with defending banks, not suing them. And in one highly publicized case, suing backfired, prompting a high-profile divorce between Linklaters and longtime client JP Morgan Chase. That’s been enough to give some firms pause—though even the most conservative acknowledge the subject is no longer off-limits. There’s big money at stake, and more cases out there waiting to be filed. “Historically, we have all adopted the same policy, which is we will not sue financial institutions,” says Robert Dombroff, co-chairman of Bingham McCutchen’s financial institutions practice. But Bingham is now willing to consider exceptions on a case-by-case basis, Dombroff says, so long as the firm believes that winning wouldn’t set a negative industry-wide precedent that would aggrieve other clients. The firm is considering three such cases, though Dombroff wouldn’t say who the parties were. That’s not a sign the firm has loosened its business conflict standards, Dombroff insists—there’s simply an unprecedented variety of cases available. But even firms that are taking a hard line on the question of business conflicts see room for others in the industry to adjust. Though Cadwalader, Wickersham & Taft had to lay off 35 attorneys after the market for securitization work dried up last year, litigation chairman Greg Markel says its continued dependence on the financial services industry means it still won’t sue banks. But so long as a case is “not something that will piss off the entire banking industry,” he says, “I can see another firm making that decision, and rationally so.” WHO WANTS TO GO FIRST Last month, Linklaters became a cautionary example of the risks of such litigation. The U.K. firm had long been one of JP Morgan Chase’s outside counsel, but was dropped—after participating in a suit against the bank. At the request of longtime client Barclays Bank, the firm’s New York litigation team sued Bear Stearns in December over the collapse of its hedge funds. Four months later, JP Morgan Chase—another anchor client—stepped in to rescue Bear, assuming the collapsing investment bank’s legal liabilities. Though Linklaters never intended to sue JP Morgan Chase, that didn’t get it off the hook. JP Morgan Chase’s management took Linklaters’ un­intended defection as an affront and scratched the firm from its preferred advisers list. The split became public. JP Morgan Chase declined comment; Linklaters didn’t return calls. “[Linklaters] bet wrong and got unlucky,” says Paul, Hastings, Janof­sky & Walker litigation chairman James Wareham, who says he’s turned down two separate cases against Bear Stearns. “That will be a cautionary tale for anyone who wants to push the envelope.” Paul, Hastings is defending UBS against a suit from HSH Nordbank over subprime losses. Wareham says the firm is even wary about defending banks in such cases, but agreed to defend UBS because the bank is an existing client. Cutting off firms that take positions adverse to the banking industry is about more than satisfying executive-level pique, says Michael Roster, a former general counsel of Golden West Financial Corp. who retired following the bank’s 2006 purchase by Wachovia Corp. It’s about maintaining security. Law firms that work closely with banks enjoy unparalleled insights into industry practices and criteria for evaluating risk. Even if a firm only sues banks it’s never worked with, Roster says, much of the litigation on breach of fiduciary duty and failure to disclose matters is likely to spawn innumerable copycat lawsuits that would “be devastating to other banks,” he believes. Firms inclined to dabble in plaintiff-side work against banks also may be turned off by the partial-contingency fee arrangements that may arise in such litigation, says Wareham. While his own firm has agreed to such terms on rare occasions, “I think most major global firms are hesitant to enter into arrangements that have a contingent nature.” The choice to sue banks has been harder on offices in New York than in D.C., where lawyers have instead been coping with the oversight and investigative work spawned by the subprime collapse. Ralph Sharpe, who heads Venable’s financial risk management and compliance team, says reviews by banking industry regulators have risen along with the subprime losses appearing on his clients’ balance sheets. Others say they’re dealing with regulatory fallout. “Some of our large clients have gotten [Securities and Exchange Commission] inquiries,” says Dan Brown, a D.C. partner at Mayer Brown, who says the firm is representing at least six companies that have been targeted. As for Congress, he says, “thus far it’s been focused on the home borrower, but certainly the accounting rules are coming.” Even if attorneys try to screen out suits with obvious industry-wide ramifications, Roster says, there’s no telling where the suits will lead. “Firms are going to try to convince themselves they can accept the work,” he says. “They need to stick to [not suing banks], or really think through the consequences.” But many firms say banks themselves have opened the door to these lawsuits by seeking help against other banks. K&L Gates partner Michael Missal says that existing finance clients have approached the firm seeking help filing suits. While the “presumption is that we will not represent a client against a major financial services firm,” he says, “those situations are arising more and more often.” Not all such representation has to be acrimonious. In one case Missal describes, a “major financial institution” that K&L Gates has worked for in the past recently gave the firm a waiver to represent a client that may sue it. (The case hasn’t been filed, so he declined to name the parties.) “I think the preference was to get someone who understands these issues,” he says. And even if seeing familiar names on the plaintiff’s side of a filing leaves banks uneasy, says Wareham, the stakes are too high for them to keep their preferred outside counsel on the sidelines. “If banks don’t become slightly less rigid, they may start seeing some of their most complex problems getting resolved by 20-lawyer firms in New Jersey,” he says. TELLING BUSINESS GOODBYE Not everyone believes banks are short qualified help. While full-service firms mull over their policies, business litigation firms like Quinn Emanuel Urquhart Oliver & Hedges and Boies, Schiller & Flexner have reason to strut. “We are in a perfect position to sue the people who are right in the middle of this: the investment banks,” says Jonathan Sherman, a partner in Boies, Schiller’s D.C. office. With the exception of Goldman Sachs and a handful of other clients, few targets are off-limits for the firm. Already, Sherman says, the firm has been retained by a sovereign wealth fund (which he declines to name) because, he says, its favored European firm wasn’t comfortable pursuing asset-backed securities claims. Quinn Emanuel, meanwhile, says it’s been deluged with work. The firm already has litigation teams working on several unfiled claims on behalf of investment banks seeking to recover subprime losses from their peers, says New York managing partner Peter Calamari. Quinn Emanuel also represents HSH Nordbank in the subprime suit against UBS. Calamari believes most full-service firms will be too timid to horn in on plaintiff-side litigation. He expects a few to try, however, and has already run across one example of a firm going after a bank “that shocked me.” Avoiding that reaction may prove to be the trick for firms considering a suit against a bank: Even if standards are loosening, few firms want to be seen as turncoats. Bingham McCutchen’s Dombroff says he’s confident his firm will stay on the right side of that line. “If we strike the right balance and maintain integrity, I think the marketplace accepts it,” he says.

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