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A litigation army is massing at major law firms to fight the wave of investigations, class actions, and bankruptcies that are expected in the coming months — and years — in the wake of the subprime-mortgage mess. Skadden, Arps, Slate, Meagher & Flom alone says it has roughly 100 lawyers across the firm working on subprime-mortgage fallout for clients such as Wells Fargo; O’Melveny & Myers has about 40 lawyers working for clients such as Option One Mortgage Corp. and Ocwen Federal Bank; and Kirkpatrick & Lockhart Preston Gates Ellis has roughly 50 lawyers delving into a bankruptcy investigation, led by partner Michael Missal, of subprime lender New Century Financial Corp. Several Am Law 200 firms formed subprime-mortgage teams last year in hope of capturing some of the action. They include Greenberg Traurig, Mayer Brown, Perkins Coie, and Pillsbury Winthrop Shaw Pittman. Morrison & Foerster launched a hedge fund recovery practice to address bankruptcy, restructuring, and fund liquidation. “This is going to continue at a pretty feverish pace,” says Missal, who was lead counsel to the examiner in the WorldCom bankruptcy proceedings. He compares the subprime mess to the junk-bond meltdown of the late ’80s: “If history is any predictor, then it’s going to take two to three years of pretty intense activity to work out.” Naturally, the deluge of work is good news for many of the firms, particularly in light of a gloomy economic forecast — brought on, of course, by the subprime meltdown. But one hand gives while the other takes away: Firms that worked on mortgage-backed securities, which boomed along with the housing market, are already feeling the heat. Last week, for instance, Cadwalader, Wickersham & Taft laid off 35 associates to cope with the downturn in corporate work. And, earlier, McKee Nelson restructured or let go about 20 associates — primarily in its New York office. But the legal fees generated for firms helping to clean up the mess could reach into the hundreds of millions, partners say. Billable hours in subprime litigation are likely to outstrip the massive numbers billed during the accounting scandals earlier in the decade. “People will blame banks, accounting firms, management, and the individual managers for their demise,” says James Wareham, global litigation chair at Paul, Hastings, Janofsky & Walker in Washington. “The backdating and accounting fraud era is going to be an insubstantial blip compared to subprime.” FEE BONANZA What separates subprime from the accounting scandals, including the collapse of WorldCom and Enron, is breadth. The accounting fights involved a few discreet companies and were largely concentrated in the United States. But subprime is an international crisis threatening banks that hawked mortgage-backed securities, rating agencies, insurers, and the lenders and Wall Street firms that backed the play. It has left litigation, securities, regulatory, bankruptcy, and acquisition partners flooded with work. “My financial services practice started dealing with the real estate crisis of the late ’80s and early ’90s, and this is more significant in its overall ramifications,” says Skadden partner Andrew Sandler, D.C.-based head of the firm’s financial services enforcement practice, which has about 25 lawyers working on subprime cases. “It touches the commercial world as significantly as that did, but this has an enormous overlay for consumers.” Last week the city of Cleveland sued 21 major banks and mortgage companies (including J.P. Morgan Chase, Lehman Brothers, Merrill Lynch and Morgan Stanley) in Cuyahoga County Common Pleas Court for roles they played in the subprime mortgage crisis; Sandler says Skadden represents a little less than half of the firms or lenders. And with Skadden defending more than 20 clients from class actions and state attorney general investigations, Sandler says he expects to add more than 10 lawyers to his practice over the next year. (Sandler declined to talk about specific clients.) Last year, according to a report by Stanford University Law School, class actions jumped 43 percent, from 116 to 166. Some 100 companies were sued in the last half of the year alone, reversing a trend of eight consecutive quarters of decline in class actions. In the past few months in the Southern District of New York, subprime class actions were filed against ACA Capital Holdings Inc., Citigroup Inc., the Federal Home Loan Mortgage Corp., Merrill Lynch, and Washington Mutual Inc. For Washington lawyers, regulatory work adds to the fee bonanza. The Federal Trade Commission, the Justice Department, the Department of Housing and Urban Development, and banking regulatory bodies are investigating everything from the way banks originate loans to whether they made deals with hedge funds to shield investors from losses. And then, of course, there’s the Securities and Exchange Commission. The agency has lawyers from every division investigating subprime cases. Lenders alone are engulfed in more than a dozen subprime inquiries, including probes into two of the biggest players in the industry: New Century and Countrywide Financial; just Cleary Gottlieb Steen & Hamilton lawyers representing Bank of America worked on last week’s $4 billion purchase of Countrywide. Subprime hedge funds are also a target: In the Northeast alone, the SEC has more than 30 investigations into hedge funds for potential conflicts of interest and asset manipulation. That’s a huge jump from the previous five years’ national average of 20 SEC hedge fund investigations per year. Securities and regulatory lawyers say government investigators are facing an extremely difficult task. They must mine through mountains of documents to prove not only incompetence but also fraud. To get through the maze, the SEC has thrown dozens of bodies at cases, with more than 25 lawyers looking into the securitization of subprime mortgages alone. Law firms are doing the same. “There’s a lot of work representing clients in the early stages of investigations,” says Jeremiah Buckley, partner at Buckley Kolar, a D.C. financial services boutique. Buckley, who also serves as general counsel of the Electronic Financial Services Council, says his lawyers are busy gathering documents for discovery while being careful not to “paralyze the business.” FEEDING FRENZY One of the biggest feeding frenzies for lawyers has been the collapse of New Century, the second-biggest U.S. subprime mortgage lender. After New Century announced early last year that it would restate earnings, the SEC and New York Stock Exchange pounced, opening investigations. Heller Ehrman partner Michael Shepard headed an internal company probe. Executives lawyered up with partners from Latham & Watkins and Skadden, among others. And then the firm filed for bankruptcy protection in Delaware last April. The proceeding is being handled locally by Mark Collins, a partner with Wilmington, Del.-based Richard, Layton & Finger, while lead counsel is O’Melveny & Myers San Francisco partner Suzzanne Uhland, chairwoman of the firm’s restructuring group. The Recorder, an ALM affiliate, reported Friday that O’Melveny has earned $12 million from the bankruptcy. The Orange County, Calif.-based company was later smacked by Ohio Attorney General Marc Dann with a lawsuit alleging lending abuses; Skadden is defending New Century in the Ohio case. Dann and New York Attorney General Andrew Cuomo have been leaders in going after the companies responsible for a record amount of mortgage foreclosures. In New York, that includes probes into Washington Mutual and First American Corp. In the end, it all simply adds up to more and more business for the lawyers. “We’d bet the number of lawyers we have working on subprime will double before June,” says Paul, Hastings’ Wareham, whose firm has about 40 lawyers focused on litigation, bankruptcy, and restructuring; the firm is handling subprime for UBS, a global investment bank. “We can’t see this clearing from a litigation standpoint in less than 48 months. And we’re nowhere near full boil.”
Nathan Carlile can be contacted at [email protected].

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