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Freshfields Bruckhaus Deringer was dumped by its oldest client the Bank of England after it chose to advise beleaguered mortgage lender Northern Rock.
The magic circle firm has been advising Northern Rock as a potential target, but was also advising the Bank of England on its dealings with the mortgage lender as recently as 18 September.
A Bank spokesperson said: "We decided it would be more appropriate in relation to our dealings with Northern Rock to appoint a different firm, and so instructed Clifford Chance."
A deed of charge recording the emergency funding created by the Bank for Northern Rock, seen by The Lawyer, was filed by Freshfields on behalf of the Bank on 18 September.
The Bank of England instructed Clifford Chance restructuring partner Nick Frome on 24 September.
Legally, the firm has avoided a conflict of interest, as Allen & Overy advised Northern Rock opposite Freshfields on the emergency facility, which was a separate transaction from any target advice.
The firm has had to be particularly sensitive about conflicts since head of corporate finance Barry O'Brien was charged over his conflicted roles on the aborted 2004 takeover of Marks & Spencer.
However, one high-profile City partner at a rival firm described Freshfields' decision to take Northern Rock as a client as "cynical in the extreme".
Freshfields' side-swapping highlights a shift in its relationship with the Bank, whose relationship managers include senior partner Guy Morton. The Bank has been a client since 1743, the year the firm was founded.
Sources say that Freshfields has sought to loosen its ties with the Bank for some time because of the potential for conflicts.
One partner at Freshfields said that although there was no technical conflict, the Northern Rock decision had caused client-management issues. Another maintained Freshfields' lucrative role as Northern Rock's adviser, while retaining ties with the Bank, is a success.