Tony Lin argues that Asia’s small and politicised litigation market won’t deliver on the hopes many international law firms are pinning on it
Asia dispute resolution is happening. At least that’s what one might surmise from recent moves in the market out here in Hong Kong. In the past few months, New York’s Debevoise & Plimpton recruited litigation heavyweight Mark Johnson from Herbert Smith Freehills (HSF), while O’Melveny & Myers hired Denis Brock from King & Wood Mallesons. Several other UK and American law firms have relocated experienced disputes partners to the region.
It has long been the dream of international firms to have disputes practices that were strong enough to be truly countercyclical. In Hong Kong, it is perhaps not surprising that the current contentious ramp-up follows in the wake of a long period of slowness in capital markets activity that’s only now starting to pick up again.
Firms say they are responding to greater regulatory activity in the region. The Chinese government’s anti-corruption campaign under President Xi Jinping, the US Securities and Exchange Commission (SEC)’s probes of possible Foreign Corrupt Practices Act (FCPA) violations by multinationals, and the stepped-up activism of Hong Kong financial regulators are all often cited as evidence of a booming disputes market for international firms.
There are no doubt opportunities for foreign advisers in Asia disputes. But one needs to be careful not to overstate the case – some of those supposed opportunities are narrow and others completely off limits.
The Chinese Anti-Corruption Campaign
Xi’s campaign to root out corrupt officials from the Chinese government is perhaps the biggest political and economic development going on in Asia at the moment. International law firms’ role in it? Practically zero.
In the West, when top government officials or businesspeople face criminal charges, big-name white-collar defence specialists clamour to represent them. In China, the opposite is true. Major Chinese firms try to avoid these cases. International firms are technically prohibited from advising on them, a restriction they find ways to work around in other areas, but not this one.
The simple fact is the Chinese government does not lose cases in Chinese courts. There is really no defence that will save those targeted, so no glory or gold for the lawyers who take on their cases. Indeed, there’s actually substantial risk. A number of Chinese defence lawyers have been disciplined or even jailed for overzealously representing their clients.
It is true that when foreign companies get targeted by the Chinese government, as in the recent bribery prosecution of British pharma giant GlaxoSmithKline (GSK), international firms typically do get involved. But what they can do is fairly limited. Just like accused officials, multinationals generally understand they can’t beat the Chinese government in court and that trying to could well have repercussions on their ability to continue operating in the world’s largest growth market. Their only choice is to grit their teeth and bear it. In September, when a Chinese court issued a record $500m fine against GSK, the company simply said it accepted the verdict and, for the umpteenth time, apologised to the Chinese people and government for its bad behaviour.
FCPA Investigations
Of course, $500m can seem like chump change when one looks at what US regulators can impose – witness the nearly $17bn fine Bank of America agreed to last summer for pushing subprime mortgages on the American public. So when Washington sniffs potential violations by multinationals operating in Asia, that’s the real bonanza for disputes lawyers in the region, right?
Yes and no. HSF’s Hong Kong partner Kyle Wombolt is taking the lead in Asia on the SEC’s investigation of JP Morgan Chase’s hiring of Chinese ‘princelings’, while Davis Polk & Wardwell’s Martin Rogers says he is advising several other investment banks on similar probes. Those are no doubt lucrative assignments.
But the very nature of a regulatory investigation means the biggest roles will go to those lawyers who deal most directly with the regulators. In a major SEC matter, those lawyers will almost always be based in Washington or New York. The work in Asia – arranging depositions, tracking down and translating documents – is important, but not the main event.
Of the $2.9bn JP Morgan reported spending on legal expenses in 2014, the likelihood is that only a very small percentage went to Asia-based lawyers. Paul, Weiss, Rifkind, Wharton & Garrison, the New York litigation powerhouse that is the bank’s lead counsel in the princeling matter, has notably not recruited or relocated a disputes partner to its Hong Kong office.
‘Even if you’re at the top end, growing a litigation practice over 30 lawyers in Hong Kong is not viable.’
Martin Rogers, Davis Polk & Wardwell
Hong Kong Disputes
Most of the bigger-name litigation partners – Johnson, Brock and, two years before, Rogers – that have been recruited of late are Hong Kong lawyers. Because of Hong Kong’s history as a British colony, large UK firms have long had disputes capabilities here. That US firms are now eager to get in on the act suggests to many that Hong Kong litigation is taking off.
But though regulatory enforcement has got tougher in recent years, the stakes in Asia’s financial capital are still too low to merit really big bucks for lawyers. The Securities and Futures Commission, Hong Kong’s top financial regulator, handed down its largest fine ever in 2012: $5.4m.
Davis Polk’s Rogers comments on the scale of the local market: ‘I kept a running list of the firms that got in touch with me in 2012 and it was 27 US law firms. So clearly a significant part of the industry had that interest. But could I point to 27 leading litigators in this market? No, it’s been the same names for over a decade and, in terms of leading litigators, it’s less than ten.
‘Even if you’re at the top end, and very successful and attracting a lot of work, growing a litigation practice over 30 lawyers [in Hong Kong] is not viable. You’re going to wind up being less profitable and having quality control issues.’
That’s why all successful Hong Kong litigators are more generalist than their peers in the US or UK would be. Rogers is widely regarded as the top financial regulatory lawyer in the territory, but neither that nor advising on US and UK compliance work is enough to keep him busy. He spent a good part of the last year defending billionaire real estate developer Thomas Kwok on charges of bribing a Hong Kong official – unsuccessfully, ultimately, though an appeal is in the works.
Brock picks up on the need for even leading Asia dispute lawyers to remain flexible: ‘We’re not going to do matrimonial cases, not going to do rape or murder, but we would do the big estate administration fights that happen from time to time,’ he says, referring to the occasional court battles among the heirs to Hong Kong’s largest fortunes.
Kwok’s trial did demonstrate the Hong Kong government’s willingness to take on the territory’s tycoon class, often seen as a protected group. Could it be the start of a new boom in white-collar cases? Don’t count on it. There are only so many tycoons.
Tony Lin in Hong Kong