Davis Polk has been prevented from acting for JP Morgan Chase in a $1bn (£708m) Enron-related lawsuit. A federal judge in New York disqualified the firm from representing the bank because it already acts for Chubb Corporation, the parent company of one of the suit's defendants, Federal Insurance Co.
In a written opinion about the case, Southern District Judge Jed Rakoff stated: “Even in an age of convenience, for a law firm to bring a multimillion dollar claim on behalf of one corporate client against the primary subsidiary of another of that law firm's corporate clients might be expected to raise eyebrows.” The conflict was deemed sufficiently strong to oust Davis Polk from advising JP Morgan.
The New York firm had been retained by JP Morgan to obtain payment of $183m (£129.6m) in surety bonds from Federal. The bonds had been issued to protect the bank against defaults by Enron. The suit, filed on behalf of JP Morgan against Federal and other insurers, sought $1bn in reimbursement for losses on transactions with Enron. The bank's claim will now be handled by New York firm Kelley Drye & Warren.
A spokesperson for Davis Polk said: “We're obviously disappointed by the court's decision. We believed that we had good grounds to proceed on behalf of JP Morgan Chase under the applicable ethical standards, but we will of course abide by the decision of the court.”
Davis Polk was hired by JP Morgan in October. By the end of November the firm had begun to look closely at the options available to recover the surety bonds issued by Federal. It is understood that when Chubb general counsel Joanne Bober discovered that Davis Polk was acting against Federal she refused to waive the conflict issue.
Judge Rakoff also failed to see how Davis Polk could contend that Chubb and Federal were distinct and separate entities. Federal accounts for more than 90 per cent of Chubb's business and the two companies share premises, board and general counsel.
The conflict has been viewed by many as a precursor to problems for Davis Polk's continued relationship with Enron's auditor Andersen. JP Morgan is one of Enron's biggest creditors and any possibility of creditors taking action against Andersen would give rise to further cries of conflict.
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