“I woke up and heard the news on the radio on Friday morning,” says a magic circle partner, “and thought, ’Christ, I hope that law firm they’re talking about isn’t us’.”
For that morning the BBC business news led with the story that the Lehman bankruptcy examiner had not only identified serious lapses by Ernst & Young in auditing the failed bank, but had also singled out “a City law firm” for giving an opinion that an accounting loophole was okay under English law. The bank was then able to import that loophole back into the US, allowing Lehman to shift $50bn (£33.24bn) of assets off its balance sheet.
As we all now know, that City law firm was Linklaters, which was only briefly able to benefit from the anonymity that broadcast media always seem to give to commercial law firms. Indeed, I’m sure it was delighted for once that its brand was not deemed well-known enough for a namecheck on the Today programme.
But Linklaters’ opinion, predict numerous City lawyers slightly ghoulishly, will be leapt upon by the class action junkies over in the US, particularly since Weil Gotshal & Manges refused to sign off any such opinion under New York law.
Well, we’ll see. It would hardly be surprising if some US plaintiff lawyer decided to take action; we’ve seen plenty of them crawling over the wreckage of the financial crisis. However, the 2008 decision in Stoneridge affords some comfort to Linklaters, because the US Supreme Court refused to extend liability to third parties linked with fraudulent businesses. And how was Linklaters to know that Lehman would leap on its opinion and use it to justify trades in the US? This isn’t necessarily a question of getting too close to a client and telling it what it wants to hear, although some of the US business blogs are intimating as much.
There’s a more general question to contend with. Accountants are neurotically specific about limiting the scope of their advice, while lawyers tend to be more generous. And yet, if you’re a major law firm that has sold itself on its global capability, it’s going to be very difficult to parcel up your advice into ever-shrinking little boxes and sell that to increasingly impatient clients. It certainly gives something for the risk managers to chew over.