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Late last summer, Shearman & Sterling settled a suit by former client EIEInternational Corporation, a bankrupt Japanese conglomerate. EIEI claimed ithad been stripped of its assets by one of its creditors, Long-Term CreditBank of Japan, Ltd., and Shearman found its work under scrutiny for thesimple reason that it had represented both parties. So EIEI sued the firm.EIEI liquidator Tasuku Matsuo was delighted when, as part of a confidentialsettlement, Shearman agreed to publish an apology in Japan’s two largestnewspapers, acknowledging “the law firm’s efforts did not help EIEInternational. Shearman & Sterling is deeply sorry.” Almost a year later, while describing the importance of humility forsamurai, Matsuo says the apology earned Shearman great respect in Japan. “Ireally admire Shearman & Sterling,” says Matsuo. “They have a pride, andthey know what shame is.” Matsuo was at least half right. While pride is not unheard-of in big NewYork law firms, they have a hard time with shame. Bristling at the publicityover the apology, Shearman is back at the negotiating table this summer,insisting that its apology meant so sorry to hear about your troubles, andnot so sorry we caused your troubles. What started out as an effort, asdescribed by Shearman’s lawyer, Munger, Tolles & Olson’s Mark Helm, tosatisfy Japanese “cultural customs” has come full circle to that mostAmerican of customs: litigation. That’s because the apology that so impressed Matsuo has only opened a newfront in the dispute stemming from Shearman’s work for both bank andborrower. EIEI has settled now with both Shearman and LTCB’s successor,Shinsei Bank, Limited. But after years of allying against EIEI, now Shearmanand Shinsei are at odds over what Shearman meant by its apology to EIEI. Andhowever highly Matsuo may think of Shearman for apologizing, now it’sShinsei’s turn to feel betrayed by Shearman. In its apology to EIEI, Shearman acknowledged that it was doing the biddingof LTCB, but had a conflict waiver from EIEI’s then president, HarunoriTakahashi. (Takahashi now says he does not read English and signed thewaiver at the behest of bank personnel and his lawyers.) The rest of thesettlement terms were confidential, but the press reported that theyincluded a payment by Shearman to EIEI. The first repercussion from the apology was to bring the litigation betweenEIEI and LTCB/Shinsei to a head. Shinsei, contending that its defenseagainst EIEI was compromised by Shearman’s apology, settled with EIEI on May23 by agreeing to pay EIEI’s trustee 21.8 billion yen (about $200 million). Shearman is now retaliating against EIEI and its former president,Takahashi, for allegedly violating the settlement by discussing the apologywith the press. Helm calls Shearman’s return to mediation with EIEI a way ofsaying that it “did not want anyone to be adversely affected bymischaracterizations of the statement.” In fact, says one attorney close toTakahashi, speaking on condition of anonymity, Shearman is building adefense against Shinsei, which now may look to Shearman for help in payingthe EIEI settlement. This attorney says that Shinsei is doing some saber-rattling via its newU.S. counsel — Paul, Hastings, Janovsky & Walker, which took over for Shearmanin 2000 after the disclosures of Shearman’s dual roles for EIEI andLTCB — intimating that it might force Shearman to help pay for the EIEIsettlement. In short, according to this scenario, Shearman’s apology to one client thatfelt betrayed made another client feel betrayed. Neither Helm nor Paul, Hastings’s John Porter would comment on thatscenario. (Note: Helm’s firm, Munger, Tolles, has represented The AmericanLawyer‘s parent company.) Juggling apologies to former clients is a sorry way to end what started outas a major Asian beachhead for Shearman. In the late 1980s, Takahashitransformed an electronics company into an international conglomerate thatowned some of the world’s premier resorts and hotels, including Queensland,Australia’s Hyatt Regency Sanctuary Cove, The Landmark London, and FourSeasons hotels in New York, Milan, and Bali. The expansion binge was funded largely by loans from LTCB, which was eagerto ingratiate itself with such a high-profile client. When the Nikkeicrashed in 1990, EIEI had 300 billion yen ($3 billion) in loans from LTCB,according to Saving the Sun, a history of LTCB by former Financial TimesTokyo bureau chief Gillian Tett. Unfortunately for LTCB, its eagerness tolend to EIEI had led to easy terms, putting the bank low on the creditorslist. So LTCB turned to Shearman and Tokyo’s Nagashima & Ohno (now NagashimaOhno & Tsunematsu) to figure out how to recoup some of its losses throughother channels. Shearman’s work on both sides of the table did not become widely known until1999, during litigation over foreclosure on the Hyatt Regency Guam betweenLTCB and EIE Guam Corporation, a local subsidiary. EIE Guam’s lawyers fromGuam’s Calvo and Clark and San Francisco’s Morrison & Foerster werereviewing bank documents when they realized that Shearman, then advisingLTCB on the foreclosure, had represented EIEI previously. EIE Guam demandedthat Shearman turn over its EIEI files, which helped settle the Guam suitsoon thereafter, with EIE Guam buying the hotel at a fraction of its value. In addition to hastening the Guam settlement, the client files also inspiredEIEI liquidator Matsuo, in charge of international claims, to file a suit inLos Angeles against Shearman and Credit Suisse First Boston, which hadadvised on the restructuring. Daniel Lefler of L.A.’s Irell & Manellarepresented CSFB, which got out of the suit on statute of limitationsgrounds. Lefler calls CSFB “a tangential player” that advised on therestructuring “on a spot basis.” Shearman, on the other hand, had those client files to live down. In oneinternal memo disclosed in court, from November 1991, future Shearmanmanaging partner Lee Kuntz explained the delicate nature of the work: “Thegoal is to insinuate the firm in the planning process and seek to becomeEIE’s general, international counsel. . . . This is very much a ‘soft shoe’project at this time, and we all are available to help with the dancing.” Despite the memos, L.A. superior court judge Florence Cooper dismissed thesuit. While appealing her decision to the U.S. Court of Appeals for theNinth Circuit, EIEI settled with Shearman, leading to the published apology. And now, to borrow Kuntz’s metaphor, it looks like Shearman’s in for a fewmore dances.

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