Sticking to the rules – the rise of the in-house litigator

As the UK’s financial institutions and leaders in commerce and industry embrace a tougher regulatory landscape, Legal Business looks at the movers and shakers in their disputes and compliance teams.

It’s December 2012 and the world’s third largest bank, HSBC, has just entered into a deferred prosecution agreement with the US Department of Justice (DoJ). It has been fined $1.9bn (£1.2bn), then the largest ever bank payout to date, over its inadequate anti-money laundering system.

Stuart Gulliver, the bank’s chief executive, says he is ‘profoundly sorry’. Damage control attempts include internal reform and the hire of high-profile former White House counsel Preeta Bansal as head of litigation and regulatory affairs in October 2012. Bansal reports to Stuart Levey, a former DoJ associate deputy attorney general who joined as chief legal officer in January 2012, while former director of the US Treasury Department’s Office of Foreign Assets Control, Robert Werner, was appointed in the wake of the scandal to head a new financial crime compliance group.

This situation has been played out in the headlines across numerous global banks, with Barclays and Deutsche Bank implicated in rigging the London Interbank Offered Rate (Libor), and Standard Chartered Bank fined over allegations it concealed transactions with Iran, leading to substantial investment in in-house disputes and compliance.

Former head of enforcement at the now defunct Financial Services Authority (FSA), Margaret Cole, who is currently general counsel (GC) at PwC, says: ‘From my time at the FSA, I saw compliance and legal growing in the banking sector. Many of those leading names in the banking sector really had to beef up those functions, not just with people who would be the worker bees, but the leadership function as well.’

Lloyds Banking Group GC, Andrew Whittaker, who joined Lloyds last year from his post as GC of the FSA, states: ‘It is important to recognise that maintaining positive relationships with the regulators is beneficial to everyone. The regulatory landscape is tougher, but our response isn’t focused on pushing back; the underlying theme of shared objectives means that when there’s a new regulatory initiative, the banks will want to work with the regulators – the relationship is very important.’

The statistics agree: Allen & Overy last month unveiled its annual tally of criminal antitrust fines handed down by the DoJ. Conducted by head of the firm’s US cartel defence practice, John Terzaken, previously a director of criminal enforcement at the DoJ, the results showed criminal fines largely stemming from Libor-related penalties amounted to $1.02bn in the last year alone.

But while global banks have been under pressure to respond in very definite terms to the serious shortcomings that arose post-financial crisis, they are not alone in bulking up their litigation and compliance functions, which is a trend witnessed across the entire commerce and industry sector.

The criminalisation of corporate law, and the expectation that the new Financial Conduct Authority (FCA) will shortly use its teeth, provides a clarifying backdrop even for those directors not working in regulated sectors.

Cole herself is currently looking for an experienced disputes lawyer to add to the PwC in-house team. The robust former White & Case dispute resolution head (who once alluded to her reputation to Legal Business by acknowledging people are ‘terrified’ of her) explains: ‘For my team, I feel we need to add more litigation and regulatory [people]. As far as the regulators are concerned and the impact on our business, they are signalling an intent to do more. We need the expertise to be able to deal with that. You might call it the regulator’s mind set.’

Almost as importantly, there are plenty of litigators willing to make the switch.

Banks – building internal defence

For commercially-minded litigators in private practice, one of the biggest sources of frustration is having a matter handed to them by a client when it has already unnecessarily escalated into a serious problem.

Corporate lawyers have long spoken of moving in-house to be close to the business and see deals through to the end, but the increased litigation function is now affording disputes lawyers the same opportunities to put their knowledge to use in setting up a financial institution’s systems and processes to flag up or avoid litigation at an early stage.

Clifford Chance (CC) head of litigation Simon Davis says: ‘One of the many attractions for in-house lawyers is the likelihood of dealing with problems from the very beginning and seeing them through to the end. You get to know the business very well.’ Davis should know – a number of former CC disputes colleagues are now working for financial institutions.

Examples of heavyweight bank hires in recent years include Jonathan Peddie, who in 2005 left the Magic Circle firm, where he was a professional indemnity and risk management counsel, and is now Barclays’ litigation and investigations managing director.

The bank also consolidated its in-house litigation functions, with each of Barclays’ litigation teams – Global Retail Banking, Barclays Capital and Barclays Wealth – now reporting to Peddie.

In 2002, long before the financial crisis, CC alumna and former litigation partner Maryann McMahon joined US investment bank Morgan Stanley as European head of litigation and is now heading its EMEA litigation function.

McMahon is praised by City lawyers, with one litigator describing her as ‘remarkably efficient at handling an array of problems and does not stand on ceremony at all’.

Meanwhile, at Nationwide Building Society – one of the few UK financial institutions to have kept clear of any major regulating issues, which outgoing GC Liz Kelly is rightly proud of – there is a dedicated litigation team of seven lawyers, headed by Darren Kelly who joined in 2010, after working for a number of boutique and medium-sized litigation firms in London.

Kelly is now the managing counsel for the dispute resolution and employment team and lead solicitor on the society’s personal protection insurance projects, regularly advising on fraud, professional negligence, regulation, banking and commercial litigation.

While the first word that springs to mind for a litigator may not be ‘collaborator’, Kelly says working alongside compliance is ‘more of a collaborative approach – something that’s true to a litigator’s style. A litigator is used to working with experts, witnesses and a whole range of different groups, and working in a project management-type manner. A litigator’s skills lend themselves to crisis management, for example, as it allows us to work with various people that can help guide through the various issues. By contrast, those from a non-contentious position normally only work within the client area’.

Having an insight into how to help the organisation detect and avoid trouble at an early stage is seen as increasingly important.

Taylor Wessing’s head of financial disputes and investigations, Shane Gleghorn, notes: ‘The whole spectre of bribery and corruption has made the skill-set more important, so litigators who are familiar with second-guessing matters become more useful for corporations that have operations exposed to bribery and corruption. If you have a team who can pre-emptively intervene and prevent matters getting out of hand, you’ll save a lot of money.’

‘2008 started a new trend for more lawyers to be brought in to assist with risk control, sometimes because of stark concern over the lack of independent thought at the front office end,’ says Signature Litigation’s founder Graham Huntley.

‘Sometimes the concern goes even deeper than that,’ he adds. ‘It cannot be left completely to external law firms. And I do not see the trend as defensiveness. Having the independent legal skill-set inside the institutional client actually delivers a more effective business product and more robust business all round.’

But while banks are doing all they can to pre-empt, avoid and collaborate with the regulator and need litigators with a practical, commercial head, they also need lawyers who understand how to fight their corner.

‘Certainly anyone involved in a regulated industry is looking for people with contentious regulatory experience and knowhow to deal with regulators in a contentious scenario,’ says Gleghorn.

Whittaker comments: ‘The skills you need to be a senior lawyer at a bank probably haven’t changed too much over the years. You need to be a good leader of people and a good lawyer, with the judgement to give clear advice to commercial colleagues. But the context has very much changed and so has the focus of the work. The challenging times the banks have been through mean that they are much more conscious of their role in society as a whole.’

Those with first-hand experience of working for the regulator are inevitably in demand. In the summer of 2012, Britain’s third largest bank, Barclays, paid out £290m to US and UK regulators for its role in the Libor scandal, after which it announced the appointment of former FSA chief executive Hector Sants as global head of compliance, on a reported £3m pay package.

Elsewhere, The Royal Bank of Scotland (RBS) reached an £87.5m settlement with the FSA in February to resolve Libor allegations, followed by the hire of Jon Pain, a former FSA director, as head of compliance.

This is a trend that looks set to continue. Gleghorn says: ‘The regulatory regimes in the UK will become more onerous despite what the government says about trying to free red tape. Certainly, the FCA has tried to distinguish itself from the predecessor body by indicating that it will be more aggressive and the Serious Fraud Office also appears to be taking a more aggressive line. That said, taking an aggressive approach requires resources.’

The significant others

Highly regulated industries such as energy and telecoms have generated their fair share of in-house litigation roles in recent years.

Nokia’s head of litigation, former Linklaters partner, Richard Vary, says: ‘In private practice, a litigator tends to see only one court: the court in which they are qualified to practise.

‘We gain fantastic experience of different litigation systems, all under the guidance of local experts. I get to meet and work with litigators and judges from all over the world. And, best of all, there are no timesheets.’

The latest EY EMEIA Fraud Survey reveals that energy comes second for the average fine issued by UK regulators over the latter half of 2012 and the first half of 2013. Lista Cannon, a partner and global co-head of regulation and investigations at Norton Rose Fulbright, says: ‘Regulatory imperialism by the US has been largely responsible for an emphasis on heightened compliance frameworks. The energy industry, for example, has long been at the forefront of the transnational regulatory focus and companies have responded to create a framework that works in whatever jurisdiction they’re in.’

The litigator’s rise in status was perhaps best evidenced in 2011, when Royal Dutch Shell took the unusual step of hiring Debevoise & Plimpton litigation partner and former Norton Rose disputes head Peter Rees QC as legal director, taking over from incumbent Beat Hess.

Rees has since pushed through major changes, including restructuring Shell’s estimated 750-lawyer department and hiring 112 new lawyers globally in 2012. He created a global litigation group after discovering that there was no dedicated contentious capability and appointed former Fulbright & Jaworski disputes partner Richard Hill as associate GC.

Dentons’ disputes partner, Liz Tout, says Rees’ appointment was ‘a sign of the times’. She adds: ‘It would have been unusual for a senior disputes person to have been chosen as GC ten years ago. You would have found corporate and project lawyers appointed then, not litigators.’

Litigation is still outsourced to external counsel more often than almost any other legal area, as revealed by the Legal Business in-house survey in October.

However, as Quinn Emanuel Urquhart & Sullivan disputes partner Ted Greeno explains: ‘[The] increasing proportion of external legal spend on litigation and investigations has to be managed effectively by in-house lawyers who understand and can contribute to the process as part of a team with external counsel.’

CC’s Davis agrees, commenting: ‘It makes sense for consistency and efficiency to have external lawyers working with people within the institution who are themselves litigators. It can save a lot of time – you’ve got litigation experts dealing with litigation experts.’

Rees is not the only recently appointed litigation head in the commerce and industry sector. At Telefónica, former SJ Berwin lawyer Kent Dreadon co-heads a team of around 30, alongside GC Edward Smith. Before taking on the role, Dreadon was head of litigation between 2007 and 2009, and head of competition and litigation for two years after that.

Telecoms is a good example of where repeated litigation and intellectual property wars between mobile phone manufacturers has fed the growth of contentious teams. At Nokia, Vary says: ‘When I joined in 2006, in-house litigation roles were few and far between. ‘Many companies regarded litigation as an exceptional occurrence, which they would hand over to external firms. Some, like Nokia, were realising that in a large enough business there would always be a base load of litigation.

‘For Nokia, the most frequently occurring cases were patent cases, so Nokia was growing a small in-house team for those disputes. But other disputes were still handled as and when they arose by non-specialist lawyers. Those lawyers might handle only a few litigation cases over their entire career, so when litigation did happen it was a steep learning curve for them.

‘Today I see many more litigation roles being advertised in industry. So I guess that other companies are realising the benefit of having experienced litigators in the team.’

The company is currently on its seventh case in the US International Trade Commission – ‘today’s hot spot for patent litigation’, Vary says. ‘We had 63 straight wins in our patent litigation in IPCom, something I never would have felt possible when we started.’

This will strike a chord with BT, where the in-house team has long had a developed contentious legal department. Head of BT Law Miles Jobling says: ‘What we’ve historically found and done is, where we have had a volume of work, it is more cost-effective with a better quality outcome if it’s done by people in BT. What we still do now is have specialist areas where we will always outsource that work because we’re not specialists in a particular area and it is not cost-effective to build up that skill base for a small amount of work.’

The resource-intensive nature of litigation means that, at the more specialist end, it will remain the prevail of private practice. But litigators have certainly earned their place at the corporate table. LB

sarah.downey@legalease.co.uk