Boutiques step in where mid-tier fears to tread
17 October 2011 | By Katy Dowell
The conflict-free firms taking full advantage of the litigation boom by acting against rivals’ prize clients.
The economic pressures of the recession have led to the emergence of a group of firms that are trumpeting their enthusiasm for suing financial institutions. With mid-tier firms mostly locked out of this lucrative market due to conflicts, these smaller litigation firms are picking up some of the most high-profile cases.
“I’ve always believed there’s a place for a litigation-only practice,” says Stewarts Law partner Clive Zietman, who has built a reputation for litigating against financial institutions. Zietman’s shock exit from Manches in April 2009 along with that of partner Andrew Shaw marked a strategic change of direction for Stewarts.
The firm wanted to shake off its reputation as a personal injury player and start to command the attention of lawyers who
were willing to refer work out.
“What the magic circle wants are the mega-cases with a team of 20 billing thousands of dollars,” Zietman says. “The problem is, they’ve got to get rid of the smaller cases.”
The decision to focus on top-end litigation work has had a positive impact on Stewarts’ financials. For the 2010-11 financial year it was one of the best-performing firms in The Lawyer UK 200 Annual Report, with an enviable profit margin of 40.6 per cent and an average profit per equity partner (PEP) of £926,000. Compare that with Clifford Chance, where average PEP stood at £933,000.
As top-tier litigation firms reshape their practices to keep only the most profitable work, some matters will need to be referred out.
At one time these cases would have gone to mid-tier litigation firms such as DLA Piper or Eversheds, but they are now being spread further afield to outfits that are specialists in the required areas.
“The middle tier just doesn’t have the scope to do these cases against the banks; and to be frank they don’t really have the appetite,” insists one senior City litigator. “They’ve reorganised and they want to be on the banking panels, so they’re automatically excluded from being able to do these cases.”
Another City lawyer says: “It’s always been accepted at those firms that the City [institutions are] the core clients. Those clients are on the doorstep and the lawyers have worked hard to help those companies prosper, so a lot of partners at those firms have no complaints. Those who do will leave for a smaller firm or run the risk of going it alone.”
Can’t play, won’t pay
When Simon Twigden stood down as head of litigation at Addleshaw Goddard last year to launch Enyo Law, his long-held ambition was to establish a firm with deep City roots but without conflicts. Twigden says that he was restricted as to the cases he could take on at Addleshaws because the firm’s corporate department dictated the client list.
It is a familiar story. In the days of the M&A boom litigators were forced to stand by as their firms refused to take on cases that could leave them legally conflicted. The boom is now over and litigation is in vogue, but this will not last forever and the dealmakers need to maintain the upper hand - so the conflicts continue, albeit on a much larger scale.
Hedge funds that want to sue banks; the top-level manager who wants to bring a case against their former FTSE100 employer; individuals under regulatory investigation on a global level… they all need legal representation, but finding it is not always easy.
Twigden says there has long been a demand for decent litigators who can act without conflicts, but the recession has led to a boom in that type of work. His ambition was to set up an outfit that could deal solely with such cases and when he lost the Addleshaws chairmanship race to Monica Burch he decided the time had come to put his plan into action. He set up Enyo along with fellow Addleshaws partners Pietro Marino and Michael Green.
“We were looking at the market and deciding where we wanted to be,” he recalls. “We decided we should be the firm that’s willing to take on the banks and financial institutions. There’s a space for those firms.
“Why shouldn’t clients who want to sue [financial institutions] be able to get the best representation?”
Kingsley Napley has a stellar reputation for white-collar crime and regulatory work. It will also act for employees when they want to take on their employers. It is involved with some of the most controversial cases currently making the headlines.
Partner Stephen Parkinson, a former CPS prosecutor, is advising former News International chief executive Rebekah Brooks on the fallout from the phone-hacking scandal, while partner Louise Hodges is representing Kweku Adoboli, the trader charged with fraud and false accounting at Swiss bank UBS. The latter case, it is believed, was referred to the firm by a larger City practice that was unable to deal with the scandal because of its relationship with the bank.
Employment chief Richard Fox says there is a number of reasons for City firms looking to send out work.
“It’s true to say there are conflicts and they do account for so many things,” says Fox. “But internal fee structures and fee demands from clients mean they can’t act for everybody because the clients just don’t fit.”
Twigden agrees. “There are legal conflicts and there are commercial conflicts, and there’s been a blurring between the two,” he says, adding that the commercial pressure on lawyers not to take on work that may involve litigation against big banks or financial institutions is intense.
“If you’re in a big firm you’re doing big-ticket work for the bank, which is fine if that’s where you want to be,” he comments. “If you’re in a mid-tier firm you find yourself sitting on the bank’s huge panel but rarely getting any work, so you’re left thinking, ’Why are they not hiring me?’”
It is for this reason, lawyers say, that the trickle of partners defecting from major litigation firms to specialist outfits has turned into a river.
Over the past three years Quinn Emanuel Urquhart & Sullivan has built a reputation for capitalising on conflict-based referrals through making strategic hires. The firm is now home to seven partners in the City, three of whom were appointed in the past 12 months - former Olswang partners Alex Gerbi and Martin Davies and ex-CMS Cameron McKenna partner Rob Hickmott.
The US firm is led in London by co-managing partners Richard East and Sue Prevezer QC. Prevezer was originally a well-respected member of Essex Court Chambers, but left the bar in September 2007 for Bingham, where she stayed for a little over six months before defecting to Quinn Emanuel.
At the time of her hire managing partner John Quinn set out the firm’s objective, stating: “We want to offer London litigants magic circle-level talent for disputes that the magic circle firms cannot take on because of conflicts.”
There is no doubt that these are heavyweight litigators and that the firm has made good headway on its mission statement. Quinn Emanuel has chalked up wins on a series of high-profile cases involving financial institutions, including Re Sigma Finance Corp, UBS AG and UBS Securities v HSH Nordbank, the latter being one of the first credit crunch cases.
East told The Lawyer earlier this year (1 August): “I don’t think anyone can dispute they were extremely hard cases, so it sends a message that we take tough cases. And sometimes we lose.”
Quinn Emanuel may not be the lone ranger for long, however. US firm Kobre & Kim has been vocal about its plans to grow in London. Last year the firm appointed Serle Court barrister James Corbett QC to kickstart its London campaign. Since then the firm has taken on a further three barristers, most recently adding 4 New Square’s Jalil Asif QC.
The firm has stated its intention to be the main provider of legal services to lawyers and their clients. It clearly wants to be the main competitor to Quinn Emanuel, and for the litigators that refer the work out the strengthened competition is to be welcomed.
Nevertheless, some question the long-term viability of such outfits. One City source says: “I’ll always question the work we’re sending out and where we’re sending it to. If it’s to a firm that’s hiring barristers because they think they can capture more work, my question is, ’Why aren’t we sending it to the bar?’ There are plenty of skilled barristers out there who’ll do the work and don’t have the same overheads as a law firm.”
Corbett, however, claims that there is space for a new type of firm that is “not old-fashioned”, has “no conflicts” and is committed to “not getting big”. Such a firm also needs in-depth specialists who are able to demonstrate experience when it comes to dealing with the toughest of cases.
After all, as Twigden states: “Banks hire fantastic lawyers, they pay for the best. The question is, why can’t the counterparty do the same? Why shouldn’t those people get access to the best possible advice too?”
For the firms doing the referring there are several concerns, the uppermost being whether it will take the flak if a matter is mishandled and, in the most serious of cases, spawns a negligence case.
Earlier this year Linklaters found itself in hot water after Credit Suisse launched a £120m professional negligence claim against it over advice it was given on a deal with Italian food giant Parmalat (The Lawyer, 21 March).
In turn Linklaters launched a claim against its former Italian alliance firm Gianni Origoni Grippo & Partners, alleging that it had been negligent in the advice it gave to the Linklaters partner working on the disputed deal.
The ongoing case highlights the risks that go hand-in-hand with referral relationships and demonstrates why partners must be confident in the lawyers they refer work to.
Fox says Kingsley Napley targets hires from City rivals to ensure it can deliver on quality and to firm up its referral relationships. It also aims to be “highly visible” in the profession to gain the attention of its City client base.
“We’re on lots of legal committees and have lots of involvement in the profession,” explains Fox. “I was vice-president of the LSLA [London Solicitors Litigation Association] and we’re involved with the ELA [Employment Lawyers Association]. Top employment lawyers at the major City firms need to know who we are.”
They also need to be confident that the referral firms will not suddenly move away from their stated model and start poaching their clients. “We don’t pinch clients,” Fox states emphatically. “It can lead to some tough conversations where we have to turn people away, but we won’t do it.”
As more firms look to capitalise on being conflict-free those already operating in the market will have to find new ways to
stand out. The mid-tier firms, meanwhile, are likely to disappear from the sector altogether. This is the shape of a post-recession profession, wherein boutiques are giving their peers a run for their money.