After the gold rush, the litigation

US CDO DISPUTES
Firms braced as wave of disputes starts to roll in

Since last summer US lawyers and bankers have been waiting for the wave of predicted disputes and litigation to
begin. Following the collapse of the US subprime mortgage market, big-ticket private equity deals are no more and liquidity has all but dried up – but the expected onslaught of disputes and restructuring has not begun. Until now.

In the US lawyers are starting to see work pick up. Instead of meaty, heavyweight acquisition financing, the focus is now on litigation. More specifically, litigation and investor disputes in the aggressive credit default swap market.

Last month Merrill Lynch, advised by Skadden Arps Slate Meagher & Flom US partners Jay Kasner and Scott Musoff, filed claims against financial guarantee company XL Capital Assurance (XLCA) for terminating seven credit default swaps (CDSs).

XLCA, advised by Jon Pickhardt, counsel at US litigation firm Quinn Emanuel Urquhart Oliver & Hedges, filed a counterclaim against Merrill Lynch, claiming that the bank
broke a contractual agreement by providing one or more parties with the same collateralised debt obligation (CDO) rights as previously promised to XLCA.

This squabble over contractual agreements and rights outlined in original documentation is just the type of dispute US lawyers have been expecting to begin since last year.

While the UK is still waiting for its wave of litigation to begin, US lawyers are now advising investor and bank clients as warring parties squabble over pools of debt. The credit crunch has tightened its grip in the US and now structured
finance and litigation lawyers are finding that more clients are turning to them for dispute reasons.

“It’s not just full-scale litigation that’s been on the up,” says Jones Day partner Ed O’Connell. “Investors are seeking advice because people have started to take losses. CDOs will
start to default and go into liquidation now, which is going to mean investors want guidance from legal counsel.”

During the boom period, many investors were confident the markets would not collapse and agreed to terms leading to weaker control of investment. This lower level of attention to documentation detail has caused problems in the long run.

While Skadden and Quinn Emanuel have benefited from a highprofile case that is likely to set the tone for credit crunch litigation in the US, those firms that are heavily
involved in the CDO market, with big banking or insurance clients or with substantial litigation teams, will be increasingly busy as more CDOs suffer in the unstable market.

US firms are well known for their large litigation teams and expertise in a wide range of disputes.

“It’s not the same as doing 20 or 30 deals a year, but it’s certainly been recognised that more disputes are occurring because more CDOs are hitting the triggers,” says O’Connell.

Looking at the New York elite alone, most firms could say they have sufficient market share to reap the rewards of the disputes coming to the fore. With the CDO market indicating that there will be tough times ahead, US firms are licking
their lips at the prospect of putting their expertise to the test.

It is usually a reliable guide to look to the US markets to see what trend is likely to come to Europe next. If recent US activity is anything to go by, it seems that the expected wave of disputes and restructuring is well on its way.

“The US markets are generally more litigious,” says Clifford Chance partner Michael Bates. “The CDO market’s also been more aggressive, so it’s likely that these issues will
arise first in the US. That’s not to say we won’t be experiencing the same thing in the UK soon.”

THE BLOG

Helping Joe average

A law firm is not just about its clients, but community too, and that brings with it a social responsibility. At least, that’s the view of Skadden Arps Slate Meagher & Flom senior partner Joe Flom.

Ever the philanthropist, Flom is emphatic that an honours programme set up to help students from minority backgrounds is not about furthering Skadden’s profile, but is a commitment to legal diversity.

“All I know is that the legal profession has a responsibility to promote community and it needs to become more diverse,” he says. “Law firms can do something about this and that’s why we’ve launched the programme.”

With the firm extending its longstanding fellowship promgramme to the UK last year, it is possible we could see the scheme launch in the UK in the future.

Swiss dole

It’s not just US banks that are suffering at the moment. Swiss banking giant UBS is going through some tough times, with writedowns totalling SFr40bn (£20.3bn/$40.1bn). Widespread criticism levelled at the appointment of its new chairman, general counsel Peter Kurer, has also piled on the pain.

Although some in the market are not convinced a lawyer has what it takes to sort out UBS’s woes, he has his supporters.

“The stereotype is that lawyers are risk-averse, and this doesn’t really suit this kind of role,” says one US partner. “I don’t buy it. I think if you’ve been working in the banking sector for a long time you’ll develop the right expertise.”

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