24 April 2006
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In among the bustle of activity on the German trading floor of the world's biggest bank there is a small circle of calm. Alongside Citigroup's brokers, who are frenetically shouting as fortunes are won and lost in minutes, sits a huddle of lawyers whose star is on the rise.
One of Citigroup's private banking units had to be closed down after being accused by Japanese regulators of manipulative sales practices and a failure to screen out money laundering. The scandal has forced Citigroup to listen to its lawyers, and that small group in Frankfurt, studying thick legal documents as if locked away in their own world, are part of a an innovative in-house team that is making its presence felt at one of the world's most innovative financial institutions.
At the centre of this group is the head of Citigroup's German legal and compliance department Jean-Claude Zerey. Zerey was responsible for relocating his group's position to the heart of the trading floor, where there was no way they could be ignored.
"When I was at Commerzbank I also had a place on the trading floor. It was really a worthwhile experience. When you sit there you come face to face with the problems. You can't avoid them," Zerey explains.
The legal team does, however, retain more traditional offices. Off to one side of the dealing room floor a heavy wooden door leads into a corridor and inner sanctum. Three of Citigroup's 10 lawyers spend half their time on the dealing floor, while the rest of the team offer advice from their quieter, more traditional offices. However, as if to demonstrate more forcibly the department's sensitive position, visitors must cross a precarious- looking bridge, known in Frankfurt as the 'Bridge of Sighs', in order to reach these offices.
The move onto the trading floor is just one of a myriad of changes that Zerey has instigated since joining Citigroup in July 2004. Another is the team's rapid expansion: since his arrival, Citigroup's legal team has grown to 10 lawyers, four of whom are in compliance, with recruits from some of the leading firms in the German market.
Zerey now leads Citigroup's largest in-house legal department in Europe outside of London, and he is quick to emphasise the team's global focus. "We're a local department. We negotiate documents according to German law, but we're rooted in the American way of doing things," he says.
The turning point for the legal team came in July 2004 when the bank decided that the growth of its fixed-income and structured finance business demanded greater critical mass and specialisation within the in-house legal team.
As in many banks, Citigroup had, up until that time, a more generalist approach to in-house legal advice. As then leader of the legal department, Dr Dieter Kilian, who remains a member of the in-house legal team, says the bank was "more concerned with legal management".
However, Zerey argues that in-house lawyers at banks must nowadays first and foremost see themselves as transactional lawyers with specialist product knowledge. "It can be dangerous if you have too few or not the correct product specialists," he says.
As such, the in-house team now focuses on the most important field for Citigroup in Germany - the fixed-income business, where the bank is going head-to-head with Deutsche Bank and JPMorgan for market share.
In this battle, a quick response time is paramount, hence the in-house lawyers' position on the trading floor and the need for them to be as immersed in the product development as their colleagues making the sale.
"We want to move away from the idea of in-house lawyers as just bureaucrats," says Zerey. "Of course, we have a monitoring role, but we see ourselves as executors too."
The structure of the legal department, therefore, mirrors the sharpened focus of the bank in Germany, with the key areas of activity for the legal team dictated by those with the most attractive margins, or where legal difficulties and dangers lurk.
For example, Citigroup has recently renewed its emphasis on compliance following the scandals in Japan. Although Citigroup's lawyers are reluctant to comment on it, it is common knowledge that such events have sharpened awareness at the bank over the need for a more intrusive compliance regime.
Both of Citigroup's co-heads of compliance, Marion Hanten and Alexander Splittgerber, seem aware that their positions have been bolstered by this renewed emphasis on compliance. "The value of having a strong compliance team is in the improvement of the bank's reputation. It would be rather risky not to have one," says Hanten.
For a while, Citibank's name was bandied around with Enron, WorldCom and Tyco as poster boys of the corrupted generation. Heads have rolled at Citigroup, and the Frankfurt legal team is a prime example of the cleansed operation.
Hanten and Splittgerber were recruited from regulatory authorities. The former worked within asset management in the German financial services regulator BaFin from 2003-04, while Splittberger spent almost four years at the Financial Services Authority (FSA) in London before joining Citigroup.
Up until Zerey's arrival at Citigroup, compliance was separate from the legal department. Now the emphasis is on complementary services, with Hanten and Splittgerber reporting to Zerey (even though the teams have separate budgets).
There is considerable debate within in-house circles as to whether the department should report directly to the board or whether it should be rooted in the legal department. But both Hanten and Splittgerber see the closer integration with the operational side of the business as central both to the success of their work as well as the estimation of the legal and compliance department in the eyes of new recruits.
"When you don't know what questions will arise you need to be on the ground," says Splittgerber. Hanten adds: "In previous years compliance was regarded as being very technical, almost exclusively concerned with employee matters. However, now it's a bigger challenge - it also has a regulatory role."
Zerey's view of the legal and compliance team is not surprising given his background: he started his career at US firm Cleary Gottlieb Steen & Hamilton before moving to Fried Frank Harris Shriver & Jacobson in New York, and he is a qualified solicitor in Germany, the US and England.
Zerey first moved in-house to Deutsche Bank, before joining Commerzbank and later becoming director and senior lawyer at Merrill Lynch in Frankfurt. It was from there that he was poached to build up Citigroup's legal department. He is now in the process of moulding the legal department into an active, outgoing and ambitious team. "Often the legal department of a bank is purely administrative. That's never been my view," he says.
Zerey is not your typical head of legal. At only 40 years old, his leadership style is one of inclusion and informality rather than distanced authority.
This culture has been central to Citigroup's ability to attract several high-level laterals from private practice. Two stand out: Jasmin Kölbl-Vogt and Petra Lomp, both of whom joined Citigroup in 2004 from Linklaters to beef up the legal team's fixed-income and investment fund expertise respectively.
Kölbl-Vogt is a prime example of the type of lawyer that banks such as Citigroup are now able to attract. With almost six years' experience at Clifford Chance and Linklaters in structured finance, as well as time in the US, she has considerable experience in securitisation, as well as related areas such as non-performing loans (NPLs), collateralised debt obligations and collateralised loan obligations.
Meanwhile, Lomp was seen as one of the young talents at Linklaters in the field of capital investment companies before her move in-house.
Kölbl-Vogt feels at home in her new workplace. "It's neither bureaucratic nor conventional. It gave me a new approach with considerably more creativity," she explains. "In particular she appreciates being close to the action. "We get involved as soon as the dealers get an idea. That's exciting and creative," she adds.
And although Kölbl-Vogt emphasises that the broad range of issues that arise at Citigroup is what attracted her, her specialisation in structured finance and securitisation is vital for her job.
"I'd recommend to newly qualified lawyers that they begin their career in private practice so that they can get the most up-to-date technical knowledge," she says. "I particularly had lots of involvement in the NPLs last year. In that market, questions and the preparation of documentation for structured finance transactions are commonplace. For example, recently there were queries over the transfer of different investment portfolios."
Meanwhile, Lomp benefited from being in one of the more innovative teams in the German investment funds market, which is now led by Alexander Vogt and Andreas Steck at Linklaters.
"A big part of the legal work for capital investment companies consists of negotiating contracts and working with the investment managers to draw up prospectuses," she says. "For example, if we're talking about the investment strategy for a particular hedge fund, the discussions can go on for a long time because it's possible that legal and business have differing opinions on what potential investors must understand and can understand. Therefore, it's important that you understand the business as well as have the ability to translate it into German regulatory law."
It looks as if Zerey will need more lawyers in the near future. While the strongest growth last year was in the field of capital investment companies, the recovery of the corporate market promises to be a boost to Citigroup's investment banking business.
But despite Zerey's innovative approach - the desk on the dealing floor and the emphasis on proactive thinking - he is an equal believer in the importance of a traditional, central legal department. "Even when individual units have their own lawyers, the legal department mustn't give up its central role," he states.
At least some of the desks on the dealing floor will remain calm, no matter how much bedlam is going on around them.
Aled Griffiths is editor of German legal publication Juve
|At a glance...|
|Name: Jean-Claude Zerey |
Job title: Head of legal and compliance for Germany (since 2004)
Career history: Cleary Gottlieb Steen & Hamilton, Fried Frank Harris Shriver & Jacobson, Deutsche Bank, Commerzbank, Merrill Lynch, Citigroup
Qualifications: German, English and US-qualified