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Whatever advice they may give their clients about litigation, major law firms tend to follow the same strategy whenever they themselves are dragged into court: They settle. Within the past six weeks, two major firms have coughed up tens of millions of dollars to put significant lawsuits to rest. On March 5, Dallas-based Jenkens & Gilchrist announced it would pay $75 million to settle a class action suit arising from tax shelter opinion letters written by the firm. Two weeks later, New York’s Simpson Thacher & Bartlett agreed to contribute $19.5 million to a $325 million settlement of class action claims arising from accounting irregularities at Global Crossing Ltd. The firm agreed to pay even though it had not been named a defendant in the case. In fact, virtually all major law firms that have been sued in the past two decades have settled their cases. And they have their reasons. Most believe both that juries would be unsympathetic to them and that a trial would be damaging to their practices, attorneys say. But there are downsides to the predisposition to settle. According to many lawyers, it has kept courts from clarifying issues of law firm liability and given plaintiffs’ lawyers an incentive to go after law firms. “It’s dismaying because you’re almost dragooned” into settling, said H. Rodgin Cohen, chairman of New York’s Sullivan & Cromwell, which defended several law firms sued during the savings and loan crisis of the early 1990s. Cohen said it was difficult to fault individual firms for not wanting to risk their reputations and possibly their practices in protracted litigation. “No one’s going to be a martyr,” he said. As part of their recent settlement agreements, Simpson Thacher and Jenkens Gilchrist denied any wrongdoing and gave similar reasons for settling claims against them. “The firm made a pragmatic decision to contribute to the settlement in order to put this matter behind it,” said Robert B. Fiske of Davis Polk & Wardwell, who represented Simpson Thacher in talks with Grant & Eisenhofer, the lead counsel for the plaintiffs. “We continue to believe the legal advice provided to our clients accurately reflected the state of the tax laws at the time it was provided,” said Thomas Cantrill, the chairman of Jenkens & Gilchrist. “This comprehensive settlement is a sound business decision and does not indicate we agree with any of the plaintiff’s claims.” Neither Fiske nor Simpson Thacher would comment further on the settlement. Jay Eisenhofer of Wilmington, Del.’s Grant & Eisenhofer, counsel to the lead plaintiffs in the Global Crossing class action, said that, though Simpson Thacher had never been named a defendant, he had an agreement with the firm not to toll the statute of limitations, preserving his right to sue. Eisenhofer said he was satisfied with the contribution from Simpson, which he characterized as “a good settlement from a law firm.” Law firms are risky defendants, he said, because they are frequently subject to dismissal under the U.S. Supreme Court’s decision in Central Bank of Denver v. First Interstate Bank of Denver,511 U.S. 164. The decision held that shareholders could not sue “aiders and abetters” in securities fraud cases. Simpson acted as the primary outside counsel to Global Crossing, a telecommunications network operator. When a vice president of finance, Roy Olofson, wrote a letter to the company’s general counsel complaining of accounting improprieties, the matter was referred to Simpson to investigate. The firm’s alleged failure to do so aggressively and its possible conflict of interest as Global Crossing’s corporate counsel would have been the grounds for a suit against it. A plaintiffs lawyer who asked to remain unnamed because he is suing a different law firm in a separate class action said the charges against Simpson Thacher were “mushier” than those brought against other firms in securities actions. It is not clear that Global Crossing’s drop in share price stemmed directly from Simpson’s alleged mishandling of the Olofson investigation, he explained. More typically, lawyers sued are those who helped prepare disclosure statements to the Securities and Exchange Commission and the investing public. “The cause of action is a bit attenuated,” the plaintiffs lawyer said. Kevin Rosen, the head of the legal malpractice defense group at Los Angeles’ Gibson, Dunn & Crutcher, agreed that the case against Simpson was not open and shut. To the extent that plaintiffs might have argued that lawyers from Simpson should have blown the whistle, Rosen said, they would also need to overcome significant objections on the grounds of attorney-client privilege. “Can the law adequately address the scope of attorney-client privilege and its relation to whistleblowing?” asked Rosen. “As a practical matter, the law hasn’t caught up with the implications of some of these cases.” But the firm’s quickness to settle meant there was no “laboratory” for the law to develop in this area, he said. THE S&L CRISIS Similar issues were at the heart of the S&L crisis, Cohen said. In 1993, Paul, Weiss, Rifkind, Wharton & Garrison paid the government more than $40 million to settle charges that it misled federal regulators and failed to report wrongdoing by the managers of the failed Centrust thrift. Jones Day paid regulators $51 million, and Kaye Scholer paid $41 million to avoid suit over their representation Cohen said the fact that most of the S&L cases were not adjudicated has contributed to law firms’ vulnerability to what he said are often frivolous claims by plaintiffs lawyers. A major exception to the willingness to settle came in the Federal Deposit Insurance Co.’s suit against O’Melveny & Myers over its representation of an Orange County S&L. O’Melveny took the case to the U.S. Supreme Court, which ruled in 1994 that law firms had no ethical duty to report the misconduct of thrift management to federal regulators. But the issue remains in flux, said Rosen, particularly with the advent of the Sarbanes-Oxley Act, which requires lawyers to report suspected corporate wrongdoing up the management chain and possibly to the board of directors. A requirement that lawyers withdraw from such representations and report their withdrawal to the SEC is under consideration. Given widespread negative perception of lawyers, said the plaintiffs lawyer, it was hardly surprising that most law firms would settle claims against them. “I would not want to be a law firm going in front of a jury,” he said. Most corporations, however, equally fear being unsympathetic defendants in jury trials. What law firms fear more than corporations is the way litigation sends irreplaceable professional staffs scattering to the four winds. Cohen of Sullivan & Cromwell points to the fate of Arthur Andersen, the former Big Five accounting firm, as an example of law firms’ worst-case scenario. Accountants and other staff fled the firm in vast numbers as criminal charges loomed before the firm for shredding documents relating to its work for Enron Corp. By the time Arthur Andersen was convicted of obstruction of justice in June 2002, it had effectively ceased operation. LIMITING LIABILITY Partner defections are a significant problem for most law firms in the best of times. Few doubt that a law firm facing massive litigation might crumble. The move by many firms to become limited liability partnerships, in which only those partners directly involved in a matter can be held personally liable, could actually make it easier for partners to leave troubled firms, said Rosen. They could conclude that they could make a truly clean break with a firm facing major litigation, he said. Merely moving to another firm would not shield partners from liability in a general partnership. Most plaintiffs lawyers do not want to get bogged down in litigation against individual partners. The fact that most law firm settlements have not exceeded $50 million reflects the usual level of professional liability insurance coverage at less than $100 million. Pragmatic calculations by plaintiffs lawyers, insurers and individual firms have meant that law firms in general remain “easy targets for relatively small settlements,” said Rosen. Cohen said he would like to see more plaintiffs firms sanctioned or brought before bar association ethics committees for bringing groundless claims against law firms. Such treatment, he said, might give some plaintiffs lawyers pause. On the other hand, the plaintiffs lawyer said he expected the future to bring larger claims against law firms, with insurance coverage expanding accordingly. That may prove the tipping point, said Rosen. Insurers, he said, would not indefinitely agree to larger and larger settlements and would eventually seek test cases to establish precedents. That may take some time, he said, given the fragmented nature of the profession compared with other industries. “I do think you’ll get some clarification,” he said, “but until that happens, it’s going to be tough.” Related chart: Notable Law Firm Settlements 1992-2004 Related stories: IRS Action Against Sidley May Put Privilege to the Test Update: The Tax Man’s Travails

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