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As the nation’s major law firms wrestle with how to avoid massive liability in the post-Enron world, they can take some comfort in the thought that the lawyers suing them are not entirely thrilled at the prospect either. That is because the pockets of large law firms are frustratingly small, says David Spears, a litigation partner at New York’s Richards Spears Kibbe & Orbe. Compared with corporations or accounting firms, he says, even the biggest law firms “don’t have the size or massive revenue streams or long experience managing risk.” But such realizations have come as lawyers, buttressed by the courts’ willingness to consider law firms primary violators in massive securities fraud cases, have ever-greater incentive to go after other lawyers. Indeed, Spears is in the midst of suing Chicago’s Mayer, Brown, Rowe & Maw for its representation of a now-defunct Oklahoma company, Commercial Financial Services, which marketed bonds based on worthless consumer credit card debt. The bondholders Spears represents claim that CFS, its lawyers at Mayer, Brown, accountants at Arthur Andersen, and financial advisers at JP Morgan Chase committed securities fraud when they participated in the sale of securities backed by such debt. Spears’ case got a boost in December 2001 when Magistrate Judge Sam Joyner of the U.S. District Court for the Northern District of Oklahoma denied Mayer, Brown’s motion to dismiss securities fraud claims against it, and held that Mayer, Brown lawyers may have acted intentionally to mislead CFS bondholders. “Individual lawyers often do have a motive to obtain and keep large clients such as CFS,” the judge wrote. “It is, therefore, not without the realm of possibility that an individual lawyer in his desire to keep a large client may choose to ignore facts of which he is aware, or in his zeal to give the client what it wants, recklessly ignore facts.” A showing that Mayer, Brown acted intentionally would allow bondholders to seek full restitution from the firm. Spears thinks Mayer, Brown and each of the other “institutional defendants” could be liable for anywhere from $800 million to more than $1 billion. But regardless of the outcome of the case, it is clear that Mayer, Brown does not have that kind of money. Spears declines to reveal details he received in discovery of Mayer, Brown’s professional liability insurance, but he says the amount falls far short of his hopes. LOW COVERAGE FOR LAW FIRMS Yet it is hardly surprising that firms would carry far less than $1 billion in professional liability insurance. Since 1985, there have been roughly 30 settlements or verdicts over $20 million paid by law firms, with the biggest payouts just over $50 million. One managing partner at a major New York firm says that he assumed most firms would be interested in obtaining more professional liability insurance, but adds that the insurance industry has so far shown little interest in selling unlimited coverage to law firms. Donald Breakstone, a senior vice president at the Attorneys’ Liability Assurance Society, a professional liability insurance carrier, says his company’s highest level of coverage currently is $75 million per claim. He says some carriers might offer more coverage, but doubts any are selling coverage of a magnitude that would please plaintiffs lawyers. “I would be surprised if some [firm] could buy $1 billion in coverage,” he says. However, interest in going after large law firms for such sums has clearly risen. Apart from Spears’ suit against Mayer, Brown, there is also the massive shareholder litigation arising out of the collapse of the Enron Corp., in which Houston’s Vinson & Elkins is named as a defendant. The decision last December by Judge Melinda Harmon of the U.S. District Court for the Southern District of Texas to deny Vinson & Elkins’ motion to dismiss has also sent a collective shudder through the corporate bar. But Breakstone says it is not clear that the prospect of such claims would lead either insurers or law firms to embrace ever-larger insurance policies. Insurers generally charge firms between $5,000 and $10,000 per lawyer under existing plans that provide far less than $100 million in coverage, and such costs are already regarded as onerous. Noting that a number of firms are now buying less coverage in response to expected increases in premiums, Breakstone says insurers would not welcome the challenge of marketing billion-dollar insurance plans to law firms. “They simply don’t think they could charge enough,” he says. Spears says he also can see the dilemma facing firms that might want more coverage but fear that increasing their coverage will present plaintiffs lawyers with a more enticing target. THE LLP TREND Insurance is not the only protection law firms can seek. In recent months, many firms have adopted limited liability partnership status in response to the increased risk of catastrophic suits. In LLPs, liability is confined to the firm and those individual partners whose actions gave rise to the claim. In general partnerships, all partners are personally liable for claims against the firm. Leading New York firms Sullivan & Cromwell; Paul, Weiss, Rifkind, Wharton & Garrison; and Cravath, Swaine & Moore have all become LLPs this year. But the legal protections afforded by LLP status would become operative only in the most dire of circumstances, when all of a firm’s insurance was gone and every other asset seized. Indeed, a judgment that led partners to invoke such protection would be, for the affected law firm, like an asteroid hitting the earth: an extinction-level event. As a result, firms’ considerations of whether to adopt LLP status frequently have an air of unreality, says Paul Tvetenstrand, the chairman of New York’s Thacher Proffitt & Wood, which is not currently an LLP. Though the risk of catastrophic litigation had certainly risen, he notes, most lawyers treated the risk as a distant one. “You can’t think about this sort of thing all the time,” he says. “You go on with your day-to-day life.” NOT IDEAL TARGETS Lawyers have already become accustomed to a large degree of instability in a marketplace where partners switch firms with ease and firms merge, expand, and, sometimes, collapse. Such developments are anathema to plaintiffs lawyers, whose preferred corporate defendants are not only large and staggeringly wealthy but also fairly stable organizations with a high tolerance for litigation pain. By comparison, law firms are tiny, fragile enterprises with virtually no assets beyond their highly mobile professional talent. The fact that San Francisco’s Brobeck, Phleger & Harrison imploded in the face of approximately $90 million in debt does not augur well for any proposition that partners would stand fast in the face of nine- or 10-figure liability. In all likelihood, few partners would stay with, much less join, a firm that had, say, agreed to a settlement that attached a portion of future revenue. Of course, partners in general partnerships could not escape liability just by changing firms. But Spears says the scenario corporate partners fear most — one in which their homes, cars, and other personal assets are at stake — is one most lawyers suing firms also desperately want to avoid. “You want one big suit for a lot of money, not a lot of little suits for a little money,” he says. “If you find yourself fighting over a partner’s car, you’ve already lost.” Still, by denying even this possibility with regard to most partners, law firms that have adopted LLP status have neutralized a scare tactic plaintiffs might have used in pushing for a settlement and thereby strengthened their own position at the negotiating table, says the New York managing partner. “With LLP status, there shouldn’t be a nightmare scenario,” he says. This person also expresses some hope that law firms may be slowly stepping out of the crosshairs. Firms face the greatest risk when their corporate clients go bankrupt, he says. In such circumstances, creditors tend to sue anyone they can. “Hopefully, the period of these huge bankruptcies is over,” he says. In the meantime, Spears is not backing off of Mayer, Brown. Depositions of the firm’s lawyers started last month and continue, he says. However, he is also keeping his eye on another prize: “JP Morgan. They’ve got deep pockets.” This article was distributed by the American Lawyer Media News Service. Anthony Lin is a staff reporter at the New York Law Journal.

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