It is commonly held that commercial litigation increases during any period of financial instability, as companies and investors face greater pressure on their bottom line, but some lawyers claim the legal fallout that will result from the collapse of the American sub-prime market will dwarf that of even the Enron scandal. Lawyers are counting on plenty of work as investors, particularly hedge funds, target investment banks in an effort to recover substantial losses.
The City's biggest law firms, which derive vastly greater fees from advising on non-contentious work, such as mergers and acquisitions and securities issues, than from litigation, refuse to sue big banks, either because they are contractually barred from doing so or they are are afraid of missing out on future instructions. That is providing an opportunity for smaller and specialist firms without a conflicting finance practice.
Cohen Milstein Hausfeld & Toll, one of America's most-feared class-action law firms, caused a stir when it opened an office in London last year. It has said that it would consider bringing cases against banks here.
English firms are also becoming bolder in proclaiming their willingness to sue large banks. Edwin Coe is exploring a group claim on behalf of 6,000 Northern Rock shareholders. Fox Williams has said that it would pursue credit crunch cases after representing a Belgian investment fund last year in a €100 million (£75 million) dispute with Goldman Sachs. Collyer Bristow is gathering evidence from British shareholders for class-action lawsuits in the United States. Its website boasts of its partners' eagerness to “pit themselves against the Goliaths of the banking world”.
Last summer Neil Micklethwaite, the senior London litigation partner at Bingham McCutchen - a big US firm whose London-based equity partners earn an average of £780,000 a year - left to set up an independent practice at Gherson advising wealthy businessmen, hedge funds and private banks. Mr Micklethwaite expects a raft of claims against investment banks by hedge funds believing that they were misled about the risks of the products they had been sold and the value of the underlying assets. He said: “The quality of products is precisely what we want to sue the banks for. They were ill-thought-out and ill-constructed. The risk factors were never properly put out there.”
The volume of claims is expected to be so great that even larger firms a step below the “magic circle” - already squeezed by intense competition and facing a downturn in the lucrative corporate advisory work that has buoyed profits across the City in recent years - are considering changing their stance on suing investment banks. In the past, they courted their business.
In America, borrowers, investors and other claimants filed 278 civil claims relating to the sub-prime crisis last year, according to one report. Barclays has sued Bear Stearns over the collapse of two hedge funds worth a combined $1.6 billion (£816 million), and Coughlin Stoia Geller Rudman & Robbins, which secured more than $7 billion in settlements for Enron shareholders, is leading several class actions against banks.
Barristers' chambers in London received an influx of inquiries when the credit crisis first hit in August, many from banks wanting to establish their legal obligations to borrowers, but that has yet to translate into proceedings. However, it can take more than a year for commercial disputes to reach the courts. Sources suggest that a lot of behind-the-scenes activity could produce legal action. Steven Loble, a Collyer Bristow partner, said that he was receiving an increasing number of inquiries from small companies and entrepreneurs who have been forced out of business by the banks' reluctance to extend credit. He said that proceedings were inevitable: “It's only a matter of time, a very short time. It could be today, tomorrow, it could be next week.”
Lawyers close to the banking industry said that the banks were determined to defend themselves.
Lines of battle
Banks v Banks
Barclays is suing Bear Stearns, accusing it of using a collapsed sub-prime hedge fund to offload troubled assets. Individual investors in the same fund are also suing Bear Stearns
Investors v Banks
Class actions have been launched against banks including Citigroup, UBS, Merrill Lynch and Credit Suisse. Banks are accused of improper accounting and issuing misleading statements
Politicians v Banks
Frank Jackson, the Mayor of Cleveland, Ohio, has sued 21 banks, claiming they created the crisis in sub-prime lending. He says that sub-prime loans are “no different than organised crime or drugs”
Businesses v Banks
At least three companies have sued State Street after their pension funds lost millions of dollars in sub-prime investments. State Street has created a $618 million (£315 million) litigation fund