US disputes lawyers are seeking their next hunting ground as the wave of financial crisis litigation nears its end. Legal Business asks what the next big prize will be.
‘I remember a science class in high school where I watched a snake swallow its prey. Its body became distended where the food was stuck, before moving slowly towards the end of the snake. That’s where we are with the financial crisis litigation. We are really getting towards the end of the snake with all these cases.’ So says Gibson, Dunn & Crutcher’s New York co-head and former global co-chair of litigation, Mark Kirsch, summing up the disputes market in Manhattan today.
Over the past five years, credit crisis litigation has dominated US courtrooms with respected litigation practices winning roles on some of the world’s biggest battles, such as Bank of America’s record $16.6bn settlement with the US Department of Justice (DoJ), for mis-selling mortgage-backed securities (MBS) – which remains the largest civil settlement with a single entity in American history – on which Skadden, Arps, Slate, Meagher & Flom’s Chicago-based litigation and regulatory partner Charles Smith defended, alongside Wachtell, Lipton, Rosen & Katz litigator Meyer Koplow.
A series of large settlements in the past 18 months, such as Morgan Stanley’s $2.6bn settlement with the DoJ in February, means the pipeline for these cases is running dry and the market is finally shifting away from a reliance on financial disputes. And to the palpable relief of every bank that issued MBS in the peak of subprime lending, New York’s Court of Appeal ruled in June, in ACE Securities Corp v DB Structured Products, that the six-year statute of limitations for investors’ breach-of-contract claims runs from the date the MBS contract was executed, rather than when MBS trustees failed to repurchase underlying mortgages that did not meet issuers’ warranties – as investors had argued. The ruling means that no new cases can be filed. Former US Solicitor General Paul Clement, now at Bancroft, acted for the appellant, while Simpson Thacher & Bartlett partner David Woll represented the respondent.
‘Banks are just exhausted,’ says Mayer Brown’s Washington DC-based global disputes head Michael Lackey. ‘It is clearly litigation fatigue. They are anxious to get this all behind them and for things to move on to the next sector because it’s been going on for a long time.’
Kirsch sums up the current mood: ‘Litigation has not slowed down in New York at all. We are a little bit ahead of where we were last year. There are probably firms that haven’t yet replaced the full flow of financial crisis cases, but by and large the market is pivoting. Fifteen years ago, everyone was occupied for three years with Enron work, and for a year or two with options backdating, and then the financial crisis stuff, and then Libor and FX [forex] – they have got to move on to the next thing.’
Irreplaceable
Many US partners say there are a host of conflicts waiting to be a part of the next trend. Certainly the Libor and the FX cases are still being tried, and will generate a new wave of class actions.
In August, claimant firms Hausfeld and Scott+Scott, which have so far won clients $2bn in FX antitrust settlements, led a proposed class action in Manhattan’s federal district court that accused nine banks of widespread manipulation in the $5.3trn-per-day foreign exchange rate market.
‘This has been the current wave in the antitrust context, but there are not many firms that do antitrust from the plaintiff side, so these cases have been keeping us really busy,’ says David Scott, managing partner at Scott+Scott.
The DoJ is also turning its attention to the US Treasury market, in which the primary dealers or banks that make markets in US government securities for monthly auctions by the government, have allegedly price-fixed rates.
‘This is a good example of another product that the plaintiff Bar has moved into,’ says Lackey. ‘It’s just at its start. It will spread and the general liability risk will get traction in other banks. You have to go through these early stages and see if this legal period has legs and, if it does, then you’ll get a lot of litigation coming.’
Paul, Weiss, Rifkind, Wharton & Garrison chair Brad Karp says its litigation and regulatory defence practice is more active than ever. ‘We are approaching the latter stages in the financial crisis-related litigation and regulatory matters,’ says Karp. ‘That said, our clients have never faced broader and more intense regulatory scrutiny than they do today. And this regulatory scrutiny is coming not only from traditional regulators and law enforcement agencies, but also from a host of new entrants to the regulatory sphere.’
Government departments such as the New York State Department of Financial Services, the DoJ, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Federal Reserve have become increasingly enforcement-driven, while the UK’s Financial Conduct Authority and Serious Fraud Office’s efforts to clamp down on corporate fraud have also not gone unnoticed Stateside.
‘Activists have been significantly visible in M&A-related transactions, proxy challenges and other corporate governance issues, which has led to more litigation,’ says Adam Hakki, global head of Shearman & Sterling’s litigation group. ‘This is a trend that we will see more of. Law firms that are balanced with both strong corporate and dispute practices like ours will be well positioned for this.’
Another area where there is an expected rise in cases is litigation in relation to food, where an increasing number of claimants are starting to challenge how food is labelled. According to some partners, these disputes are currently taking off in California and are expected to seep through to New York before the end of the year. In June, a group of Whole Foods Market customers filed a class-action lawsuit against the group, arguing they had overpaid for falsely labelled pre-packaged foods. While the US district judge dismissed the case in August, the organic food specialist was hit with a federal lawsuit that same month, accusing its top executives of violating securities laws by deceiving shareholders and misrepresenting the value of its stock.
Another growth area is cyber security and, while financial institutions and corporations have been tackling this threat for some time, the trend is now spreading into the automotive sector. In early spring this year a lawsuit was filed against Toyota Motor Corporation, Ford Motor Company and General Motors Company claiming they had failed to take basic measures to secure the car computer systems from hackers.
Fighting hard
Sitting comfortably with a large slice of New York’s most high-profile cases is Paul Weiss. Around 75% of the firm’s litigation and regulatory matters involve exposures in excess of $1bn. For example, the firm represented the National Football League in its concussion litigation and acted for Citigroup in its ADIA arbitration. The firm also billed record hours in its bribery and defence practice this year.
The renowned dispute practices at elite firms Sullivan & Cromwell and Simpson Thacher & Bartlett; as well as Cleary Gottlieb Steen & Hamilton, Gibson Dunn, Skadden Arps, Debevoise & Plimpton, Kirkland & Ellis; and claimant firms like Quinn Emanuel Urquhart & Sullivan and Boies, Schiller & Flexner, have all remained active in a market that has favoured top-tier disputes shops, while mid-tier firms have had less opportunity to shine.
‘The gap between the truly elite litigation firms and the rest of the pack is continuing to widen,’ says Karp. ‘The litigation that exists today tends to involve higher stakes and clients are looking for firms capable of trying billion-dollar matters. We are fortunate to have been retained in a large percentage of these matters.’
One firm that has successfully increased its disputes offering over the last five years, and made a notable push to laterally recruit and use its international disputes network to augment its US offering, is Shearman, a firm that was once unusual for maintaining a relatively small litigation practice. As one partner at a litigation-heavy US firm puts it: ‘Shearman has grown again after shrinking for a while. There was a while where we weren’t seeing them much, but they are very much back on the radar.’
Shearman’s Hakki comments: ‘We very openly made it a strategic priority to significantly increase the size and role of the disputes practice and we have successfully done that.’
In 2014, the firm elected seven new partners in its litigation group. Some 35% of the group’s litigation partners are former government enforcement lawyers and the group as a whole contributes around 30% to firm-wide revenue.
In December 2014, Shearman partners Stephen Fishbein and John Nathanson achieved a high-profile victory for their client, Todd Newman, formerly of Diamondback Capital, when the Second Circuit Court of Appeals overturned the hedge fund manager’s insider trading conviction on appeal. The firm also won a record $50bn arbitration award for the Yukos majority shareholders against the Russian Federation last summer after it breached international obligations. Partners Emmanuel Gaillard and Yas Banifatemi acted for Yukos’s majority shareholders.
The fact that many products and securities are susceptible to price-fixing will keep the flow of customary securities class action work coming. This, combined with the rise of investigations work and antitrust claims will keep many partners’ bellies full.
But as the domestic market finally closes the door on conflicts directly related to the crisis, it is unlikely that a huge wave of litigation will hit the market in the near future, but rather a series of significant issues will work together as a replacement. The consensus is it is a dynamic that will continue to play to the 15-20 elite dispute shops even amid pressure on mid-market work.
This, combined with the claimant-friendly antitrust reforms set to hit Europe this October – which aim to consolidate and clarify existing consumer rights legislation into one comprehensive source – will provide some opportunity to New York’s softer mid-tier, which hasn’t quite managed to punch above its weight in such high-stakes litigation.
Scott+Scott is taking full advantage of the opportunities available in Europe and is set to launch in London this year, having hired Freshfields Bruckhaus Deringer disputes senior associate Belinda Hollway to head its first European base. ‘Cross-border disputes have become more important. Cases have been coming out that have been very clear in saying that “US courts are not going to be the courts of the world”. For example, if you purchase stock on the foreign exchange and you’re a foreign purchaser, you cannot come to the US and sue under the US securities law,’ adds Scott.
Either way, New York’s elite firms and their prized disputes practices will not be going hungry. It is the firms lower down the food chain that need to figure out where their next meal will come from.
jaishree.kalia@legalease.co.uk