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A federal judge Monday disqualified New York-based Davis Polk & Wardwell from representing J.P. Morgan Chase in a lawsuit seeking payment of $183 million in Enron-related surety bonds from Federal Insurance Co., a subsidiary of Chubb Corp., another Davis Polk client. “Even in an age of convenience, for a law firm to bring a multimillion-dollar claim on behalf of one corporate client against the primary subsidiary of another of that law firm’s corporate clients might be expected to raise some eyebrows,” wrote Southern District of New York Judge Jed S. Rakoff. “In this case, it also requires the law firm’s disqualification.” Federal and other insurers had issued surety bonds guaranteeing Enron obligations to Mahonia Limited, an energy trading operation based in the British Channel Isles. J.P. Morgan Chase, one of Enron’s largest creditors, filed suit Dec. 11 against the insurers after they refused to make payments on the sureties because the insurers claimed the Mahonia trades were sham transactions. Simultaneously, Davis Polk had been preparing securities filings for Chubb. Also on Dec. 11, Davis Polk filed with the Securities and Exchange Commission a form S-3 on Chubb’s behalf. In one section, the form stated, “Chubb has obligations under outstanding surety bonds relating to Enron affiliates [of] approximately $220 million.” Judge Rakoff pointed to this statement in his finding. “[I]t is clearly to [J.P. Morgan] Chase’s interest that Chubb has already acknowledged that the Federal security bonds are obligations of Chubb,” Rakoff wrote. Davis Polk had argued that it had no conflict of interest because it represented Chubb, not Federal. Rakoff found this distinction “wholly artificial,” and noted that Federal accounts for 95 percent of Chubb’s revenue and 90 percent of its profits. In pointing to the S-3, a disclosure form related to a shelf registration pursuant to a public offering, the judge noted that “the potential for conflict is hardly limited to the trial context but can infect, actually or potentially, a broad spectrum of activities, as the aforementioned S-3 demonstrates.” Rakoff’s ruling may not bode well for Davis Polk’s continued role in the Enron matter, where the firm represents both J.P. Morgan Chase and Arthur Andersen. The recent revelations about the accounting firm’s destruction of documents have made lawsuits against Andersen by creditors increasingly likely. “We are obviously disappointed by the court’s decision,” Davis Polk said through spokesman Kevin Cavanaugh. “We believed that we had good grounds to proceed on behalf of J.P. Morgan Chase under the applicable ethical standards, but we will of course abide by the decision of the court.” Judge Rakoff said in J.P. Morgan Chase Bank v. Liberty Mutual, 01 Civ. 11523, that he will stay the suit for two weeks so that J.P. Morgan Chase can obtain new counsel.

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