Kirkland & Ellis’ competitors must have had a field day in March watching the firm get smacked around first by a judge in Florida and then by Morgan Stanley (see p. 68). The brokerage company not only fired Kirkland from its high-profile fraud case involving Ronald Perelman, but also hinted it might file a malpractice claim.

The fiasco arose after Morgan Stanley failed to turn over discoverable documents to Perelman, who is suing Morgan Stanley for fraud. To punish Morgan Stanley for its “egregious” behavior, the judge ruled the company must now prove it’s innocent of Perelman’s allegations.

So who is to blame for this mess? It’s possible that Kirkland engaged in the discovery mischief without consulting with its client. That’s highly unlikely. It’s also possible that Kirkland was following orders, and, when things went to hell, agreed to be the fall guy.

Personally, I think Donald Kempf Jr., the CLO of Morgan Stanley, is to blame. Kempf was a former partner at Kirkland and had used the firm for a good chunk of his client’s business. It was a close relationship (the firm reportedly has a meeting room named after its former partner).

Like many GCs, Kempf follows the old-school approach to picking firms. It’s all about relationships–giving work to your former law firm or law school buddies. Today, GCs have to be much smarter than that. As this month’s cover story reveals, GCs are under tremendous pressure to cut costs, streamline their budgets and be more creative in managing outside counsel.

Lastly, a GC’s allegiance should be to his clients–not his former law firm coworkers. As the champion of ethical behavior in a company, GCs should avoid any perception of a conflict of interest.