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He didn’t yell, “You’re fired!”, but it was just as dramatic. Close to 5 p.m. on March 22, only days before a high-stakes trial was set to begin, Morgan Stanley chief legal officer Donald Kempf Jr., calmly watched his local counsel in a West Palm Beach courtroom deliver a staggering blow to his lead lawyers at Kirkland & Ellis. Carlton Fields made a last-minute motion to substitute lead counsel and request a continuance. Morgan Stanley argued that the court had lost all confidence in statements or representations made by Kirkland, and said the firm could not effectively represent the company. The motion also threatened Kirkland with a potential malpractice suit. Kirkland lead partner Jeffrey Davidson, who had been pulled out of the court only moments earlier to hear the news, looked shocked, according to observers. The embarrassment for Kirkland didn’t end there. Kempf told the court his lawyers hadn’t been giving him the full story. “There is nothing like real-time listening to the court and following the transcript, which I’ve been doing over the last two days, to drive home the reality in this situation,” he said to Judge Elizabeth Maass. “I’m dealing with both my colleagues and counsel, and what I’m hearing from them is not necessarily jiving with what I’m hearing with my own ears.” Strong words — particularly because Kempf spent 34 years at Kirkland and has a conference room in the firm’s Chicago office named after him. For two months the firm and Morgan Stanley had received stern rulings and derisive comments from Judge Maass for alleged discovery misdeeds. Earlier that month, she had shifted the burden of proof in the case to Morgan Stanley, saying that the defendant had been “grossly negligent” in turning over discovery documents to the plaintiff, financier Ronald Perelman’s Coleman (Parent) Holdings Inc. Perelman is suing Morgan Stanley for $2.7 billion, claiming that the bank knew or should have known about an accounting fraud that thrust its client Sunbeam Corporation into bankruptcy in 2001. Morgan Stanley represented Sunbeam in its 1998 acquisition of Perelman’s stake in camping gear maker The Coleman Company Inc. for $1.5 billion, including $680 million in Sunbeam stock. Perelman says he suffered $680 million in losses when Sunbeam stock plummeted. Morgan Stanley gained its dismissal of Kirkland. But to little avail. On March 23 Maass said she would instruct the jury that Morgan Stanley participated in the fraud against Perelman. Consequently, Perelman would only need to prove that he relied on the bank’s information. Moreover, Maass’s 18-page ruling detailed continuing discovery abuses that she said would call into doubt all of Morgan Stanley’s discovery responses. Maass also revoked Kirkland partner Thomas Clare’s permission to practice before her court, noting misrepresentations he made on Morgan Stanley’s behalf. So Kirkland has lost one of its biggest clients in a case handled by firm superstars, including Davidson, head of the Los Angeles office, and chairman Thomas Yannucci. But Kirkland’s culpability in the Palm Beach mess is far from clear-cut. Morgan Stanley has yet to file a malpractice claim. Sources close to both Morgan Stanley and Kirkland say that the firm continues to represent the bank on other matters. Both facts fuel speculation that Kirkland’s dismissal was just a maneuver for more time or to establish grounds for appeal. Kempf, a Marine Corps veteran, is known for his take-no-prisoners approach to litigation. If it was a play for time, though, it failed miserably. Though Morgan Stanley had asked for a 180-day delay following Kirkland’s withdrawal, Maass gave the bank all of one week. Kirkland declined to comment on the matter, citing ethical obligations to Morgan Stanley, but a firm spokesperson did send an e-mail saying the firm believes that the record will show that its attorneys acted in good faith. A handful of ex-partners are skeptical. Even in a firm famed for aggressive litigation tactics, the Washington, D.C.-based litigation group running the case has a reputation for unduly pressuring overworked lawyers to deliver results and occasionally pushing the ethical envelope, they say. Far many others, however, say the aggressive litigation approach does not translate into unethical behavior. Judge Maass’s subsequent comments in court also cast doubt on Kirkland’s role in the discovery debacle. She has explicitly stated that she didn’t observe any acts of legal malpractice. And she repeatedly noted that no evidence showed that Kirkland did anything other than follow the directions of its client. “Kirkland & Ellis on occasion may have served as proxy for communication to the court, but that doesn’t make them directly responsible for the misrepresentations,” she said on March 30. “They were all misrepresentations from Morgan Stanley.” Meanwhile, the dozen Kirkland lawyers holed up in Palm Beach have packed their bags and headed home. Co-counsel Kellogg, Huber, Hansen, Todd, Evans & Figel has taken the lead role, and Shearman & Sterling, led by prominent litigation partner Steven Molo, has stepped in to assist. Kempf called Molo the day after firing Kirkland, according to a person familiar with the matter. Molo, a former Winston & Strawn partner in Chicago who has known Kempf for years, is also working on two litigation matters involving the bank’s mutual fund companies. As Kirkland partners can attest, however, Molo should watch his step. Morgan Stanley’s lawyers have a dismal track record in West Palm Beach.

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