Hunting titans
An Insight special on banking litigation
INSIGHT: BANKING LITIGATION
Hunting titans
As banks remain in the crosshairs of regulators and
claimants, Legal Business teamed up with Stephenson
Harwood to seek the views of the in-house banking
community on attitudes to disputes and risk
RICHARD LLOYD
I
f you needed confirmation of just how
challenging the litigation climate is for
many of the world’s banks, then JPMorgan
Chase’s results for the third quarter
provided it, in all their billion-dollar detail.
Announcing a $400m loss for Q3 in October,
the bank revealed that it had set aside $23bn
for litigation costs arising from a series of
regulatory investigations, resulting litigation
and economic crisis-related suits.
‘We continuously evaluate our legal
reserve but in this highly charged and
unpredictable environment, with escalating
demands and penalties from multiple
government agencies, we thought it was
prudent to significantly strengthen them,’
commented JPMorgan’s chief executive
Jamie Dimon in a statement. By way of
comparison, the bank’s litigation fund
stood at $3bn in 2010.
Although JPMorgan is one of several
international finance houses to face mounting
legal costs its travails, in particular, reflect
the challenges facing the banking sector.
Today’s bank executives and senior inhouse counsel face a complex web of
investigations fuelling claims arising out of
the financial crisis and more recent scandals,
new regulatory oversight and tougher
laws proposed by the likes of the Financial
Services (Banking Reform) Bill in the UK and
Dodd-Frank in the US.
To assess how this new environment
is affecting the finance community, Legal
46 Legal Business December 2013/January 2014
Business worked with Stephenson Harwood
to canvass in-house lawyers at the major
banks. We wanted to assess a range of topics,
including how the volume and sources of
litigation have varied in the last five years;
how banks’ litigation spend has changed;
their approach to bringing cases against other
banks; their views on arbitration and thirdparty litigation funding; and their approach
to selecting outside lawyers, gathering
responses from more than 100 senior banking
in-house counsel.
To many, both inside and outside of the
banks, the shift in environment has been
profound. ‘It’s changed in an unrecognisable
way,’ admits one head of litigation at a
leading bank. ‘It’s been driven by so many
regulatory investigations and you now have
so many regulatory agencies competing to
issue the biggest, baddest fines.’
‘There’s been a remarkable shift in the
way that people view banks in the last five
or six years,’ asserts Mark Howard QC, a
barrister at Brick Court Chambers. ‘Before
the economic crisis, most people started from
the point that banks were straightforward
and honest but now the whole climate has
changed. Banks’ reputations have been
tarnished, not only in the eyes of the public
and the press, but also in the eyes of judges.’
With cases coming to light over the
London Inter-Bank Offered Rate (Libor)
scandal, and more expected from the
brewing investigation into foreign
u
Illustration MILES COLE
LEGAL BUSINESS AND STEPHENSON HARWOOD
INSIGHT: BANKING LITIGATION
GROWING SOME TEETH – REGULATION IN THE POST-LEHMAN WORLD
If the world’s major financial regulators could be faulted for failing to spot
and prevent much of the fallout from the banking crisis, it’s fair to say that
ever since the 2008 collapse of Lehman Brothers they have been attempting
to redress the balance. The regulatory landscape that financial services
firms face has never been more challenging. As Margaret Cole, the former
head of enforcement at the Financial Services Authority (FSA) and now
general counsel (GC) at PwC, recently told Legal Business, the regulatory
framework that impacts the business in-house lawyers work in will get
tougher. According to one respondent: ‘History suggests that there are more
regulators now that can trace an institution’s past actions, so it’s obviously a
more combative environment now than before.’
Our survey asked several questions relating to the regulatory environment
that banks now operate in and the responses
largely highlighted the far tougher approach
from watchdogs. Just over three-quarters of
respondents said that the regulatory climate
had become more combative in the last three
years, with 61% saying that they are seeing
more litigation as a result.
Banks are quickly becoming accustomed to
a new regulatory structure in both the UK and
overseas, most notably in the US. Given that
the successors to the UK’s FSA – the Financial
Conduct Authority (FCA), the Prudential
Regulation Authority and the Bank of
© REX/Sipa Press
England’s Financial Policy Committee – were
only formed in April 2013, the market is still
coming to terms with how the new regulatory structure will work in practice.
However, the scandal over the manipulation of Libor, a key financial market
indicator based on the rate at which banks are prepared to lend to one another,
has certainly given the FCA an early opportunity to prove its regulatory mettle.
In October, the watchdog announced that it had fined the Dutch financial
institution Rabobank £105m for Libor-related misconduct. That fine was the
third largest ever issued by the FSA or FCA, and was the fifth penalty levied by
UK regulators as part of the ongoing investigation (prior to its abolition the FSA
announced fines against Barclays, UBS and The Royal Bank of Scotland).
In a release announcing Rabobank’s fine, Tracey McDermott, the FCA’s
director of enforcement and financial crime, commented: ‘Firms should be in
no doubt that the spotlight will remain on wholesale conduct and we will hold
them to account if they fail to meet our standards.’
The Libor scandal has also showcased the increased co-operation
between international regulators, a trend which has been evident for several
years. In its investigation into Rabobank, the FCA worked closely with
regulators in the Netherlands and Japan as well as the Department of Justice
(DoJ) and Commodity Futures Trading Commission (CFTC) in the US.
One of the features of the new tougher climate in the States has been the
emergence of newly empowered regulatory bodies such as the CFTC. For a
long time seen as a fairly sleepy overseer with few enforcement powers, the
Commission has been reinvigorated, in part thanks to provisions in the Dodd-
48 Legal Business December 2013/January 2014
Frank Act that enhanced its regulatory arsenal. As a result, in the last two
years the CFTC has opened a record 800 investigations and in 2012 obtained
orders imposing more than $931m in sanctions.
In New York the new Department of Financial Services (DFS), formed in 2011
to improve oversight of the Empire State’s numerous financial institutions,
has also hit the headlines for its regulatory zealotry. In August 2012, before
federal authorities could reveal their hand, the DFS announced allegations that
Standard Chartered had been involved in facilitating hundreds of billions of
dollars’ worth of deals for Iran, in contravention of US sanctions. The UK-based
bank was ultimately fined $340m by the New York watchdog on top of a $100m
fine from the Federal Reserve and a $227m penalty from the DoJ.
For regulatory investigations and litigation to arise directly out of the
economic crisis, such as over the selling of
poor quality mortgage securities, was not
surprising. A cause for greater concern in the
banking community, however, has been the
number of investigations to emerge that are
largely unrelated to the crisis, such as Libor
and the unfolding scandal around foreign
exchange rates.
‘I don’t think there’s a single reason
why we’re seeing more activity, there’s
simply a lot more scrutiny of the industry
than before,’ comments William Sweet,
head of Skadden, Arps, Slate, Meagher
& Flom’s financial institutions regulation
and enforcement group. Plus there’s been
a notable shift at the head of America’s flagship markets regulator, the
Securities and Exchange Commission (SEC).
Since she took over as head of the SEC, Mary Jo White has indicated that
she is prepared to get tougher on the financial industry than some of her
predecessors. As a former Debevoise & Plimpton litigation partner and before
that as US Attorney for the Southern District of New York, she might have been
expected to bring a litigator’s zeal to enforcement when she picked up the
reins at the SEC in April 2013. Where she has proved particularly aggressive is
in questioning whether banks should routinely be allowed to neither admit nor
deny wrongdoing in settling with the Wall Street regulator.
In a speech she gave in September, White suggested that in many cases
a no-admit-no-deny approach was still best, but she added: ‘Sometimes
more may be required for a resolution to be, and to be viewed as, a sufficient
punishment and strong deterrent message.’
That change of tack is clearly resonating with the litigation Bar in the US.
‘Mary Jo White has definitely sent a message that she’s going to be more
aggressive. But it will take more time for the implications of that to shake out
– whether it will mean more enforcement actions, more stringent settlement
demands and penalties, more trials, or different enforcement priorities,’
insists Stephen Ascher, co-chair of Jenner & Block’s securities litigation
and enforcement practice. More time under a regulatory cloud like this is
something that most banks would undoubtedly prefer to avoid.
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LEGAL BUSINESS AND STEPHENSON HARWOOD
Same
Same
34%
Same
34%
Sam
34%34%
Decrease
Decrease
37%
Decreased
37%
Decrea
37%37%
ARE YOU EXPERIENCING MORE OF
THE FOLLOWING?
Claims for mis-selling Are you now seeing more or les
Claims for mis-selling Are you now seeing more or les
CLAIMSClaims
FOR
MIS-SELLING
youyou
nownow
seeing
more
or less
for mis-selling
seeing
more
or l
Claims
for mis-selling Are Are
No
No
54%
No54%
No
54%54%
Yes
Yes
46%
Yes
46%
Yes
46%46%
No
54%
Yes
46%
Claims by hedge funds
by hedge funds
CLAIMSClaims
BYClaims
HEDGE
FUNDS
by hedge
funds
Claims
by hedge
funds
JPMorgan’s Jamie Dimon testifies before a Senate Committee in Washington DC © REX/KeystoneUSA-SUMA
u exchange trading, those reputations are
going to take some polishing.
ON THE RISE
Yes
Yes
13%
Yes
13%
Yes
13%13%
Spending on litiga
Spending on litiga
Spending
on litigatio
Spending
on litig
Yes
13%
the industry of the litigations filed after the
No
No
No
financial crisis.’
87%
87%
No
87%
No
While much of the recent
focus has been
More
Same
87%87%
on the myriad
claims facing
31%JPMorgan and in
34%
particular its November $13bn settlement with
Spending on litig
Claims arising from defective legal documentation
Spending on liti
arising from defective legal documentation
the Department of Justice (DoJ) in the US over Claims
CLAIMS
ARISING
FROM
DEFECTIVE
on litiga
arising
fromfrom
defective
legallegal
documentation
Less
Spending
on lit
Claims
arising
defective
documentation Spending
sales of mortgage securities,
it is by no means Claims
LEGAL
DOCUMENTATION
35%
the only bank to face paying out billions.
No
Yes
According to data firm SNL Financial, in Yes
difference
27%
27%
Yes
March the six largest US banks, including Yes
16%
Yes
27%
No 8% Yes
JPMorgan and Bank of America, had racked 27%No
47%
53%
27%
up $63bn in settlements related toNo
the
No
Yes
73%
financial crisis and scandals such
as Libor
No
73%
No
76%
Increased
since 2010.Decreased
With JPMorgan’s
mounting
No
73%73% costs,
37%easily pass63%
u
that total could
$100bn.
73%
Not surprisingly, given the obvious change
in climate, our survey showed an increase
in contentious cases involving banks. Of
the respondents, 59% said that they were
involved in more litigation from 2008 to 2012
than in the previous five years. ‘The sharp
increase in lawsuits as a result of the 2008
crisis makes it very apparent that litigation
is almost inevitable,’ said one banking GC in
response to the survey.
‘Yes, we’ve seen an increase in litigation in
the financial sector,’ confirms William Luker,
head of litigation at The Royal Bank of Scotland
ARE YOU SEEING MORE OR LESS
(RBS). ‘In the US, in particular, regulatory
Budg
Claims consequent on regulatory investigations
Budg
Claims consequent
on regulatory
investigations
LITIGATION
NOW
THAN
IN
THE
CLAIMS
CONSEQUENT
ON
REGULATORY
authorities and investors have shown increased
Budget
If
yes,
how
ofte
Bud
Claims for mis-selling Are you now seeing more or less litigation than in the period 2008-12? Claims
More
litigation
in-house?
consequent
on
regulatory
investigations
Claims consequent on regulatory investigations
PERIOD 2008-12?
appetite to pursue litigation against banks.
INVESTIGATIONS
What we haven’t necessarily seen is an uptick
in banks suing one another.’
With many predicting a ‘tsunami’ of
More
Yes
No
Same
Yes
litigation after the 2008 collapse of Lehman
No
31%
Yes
49%
51%
Yes
34%
49%
Yes
Yes number might have been
No
51%
No
No Brothers, that
49%
No
49%49%
46%
51%51%
be higher. But as some point
54%expected to
51%
out, it’s dangerous to become too focused on
Less
statistics. ‘You have to be careful not to rely
35%
too much on numbers alone,’ warns Credit
Suisse’s global head of litigation, Pierre
Gentin. ‘The real story
is the
significance
Claims
by hedge
funds for
Spending on litigation increased in last year?
Financial regulatory climate more combative? Considering using arbitration
Yes
13%
Decreased
Decreased
16%
Decreased
16%
Decreased
16%16%
Increased
Increased
84%
Increased
84%
Increased
84%84%
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December 2013/January 2014 Legal Business 49
87%
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6
INSIGHT: BANKING LITIGATION
Deutsche Bank v Sebastian Holdings
This case was one of the largest ever
to be heard in London’s High Court,
brought by Deutsche Bank over $240m
in losses incurred at the height of the
financial crisis by Sebastian Holdings,
the investment fund run by Norwegian
businessman Alexander Vik. Sebastian
then launched a counter-claim against
the bank for $8bn in damages.
The case centred on a series of
complex currency trades that unravelled
dramatically after the collapse of Lehman
Brothers in 2008, forcing Deutsche to
make large margin calls to cover
Sebastian’s positions. Those calls, Vik
claimed, caused him to close down a
number of profitable positions, hence his
claim against the bank.
After a four-month trial in the High
Court, Mr Justice Cooke found in favour
of Deutsche, ordering Sebastian to pay
$240m. At the time of going to press costs
had not been awarded although, with the
two sides fielding four and five counsel and
the case stretching over several months, it
could be one of the costliest claims to arise
from the crisis.
For Deutsche Bank: Freshfields Bruckhaus
Deringer; David Foxton QC of Essex Court
Chambers; and Sonia Tolaney QC of 3
Verulam Buildings
For Sebastian Holdings: Travers Smith; and
David Railton QC of Fountain Court
Graiseley Properties v Barclays Bank;
Deutsche Bank v Unitech
Although these were brought as two
separate cases, they took on combined
significance when a Court of Appeal judge
ruled in October that parties could attach
accusations of Libor rigging to their cases
against the banks.
Both were originally brought as
claims concerning the mis-selling of
interest rate swaps which turned sour
in the financial crisis. Graiseley
Properties, part of the Guardian Homes
Group nursing homes business, launched
50 Legal Business December 2013/January 2014
Our survey showed a mixed picture
when respondents were asked about the
current level of claims compared with the
five-year period of 2008 to 2012. A little less
than a third (31%) said that they were now
seeing more litigation, while 35% said they
were seeing less and 34% responded that it
had remained the same. The varied picture
from these responses reflects the wide range of
cases that different types of banks are facing.
‘The mixed results for this question
perhaps reveal the experiences of different
institutions,’ comments Edward Davis, a
u
RECENT KEY BANKING CASES FROM THE CRISIS
a claim against Barclays in April 2012 over
its purchase of certain swap and collar
derivative products, which were used
to refinance two loans that the bank
had issued.
After news of the Libor scandal broke
in the summer of 2012, Graiseley added an
allegation to its claim that Barclays had
misrepresented the Libor rates. Among a
group of banks accused of manipulating
Libor, a key benchmark determined by the
rate at which banks are prepared to lend to
one another, Barclays was fined $450m by
US and UK regulators.
In the Unitech case, Deutsche Bank
sued the Indian property company over
the repayment of a loan and a further
$11m owed for a related interest rate
swap. Unitech then counter-sued, claiming
that both the loan and swap were linked
to Libor rates. As in the Graiseley case,
Unitech sought to amend its claim to add
allegations of Libor manipulation, a move
that was rejected in February 2013 by Mr
Justice Cooke. However, in light of the
Graiseley ruling, the Libor decisions in both
cases went to the Court of Appeal where
Lord Justice Longmore ruled that both
claims could proceed.
The Graiseley case is scheduled for April
2014 and looks set to become a key test
case for Libor-related claims.
For Graiseley: Cooke, Young & Keidan; and
Stephen Auld QC of One Essex Court
For Barclays: Clifford Chance; Robin
Dicker QC and Jeremy Goldring QC of
South Square
For Deutsche Bank on the lenders’
action: Allen & Overy; and Richard
Handyside QC of Fountain Court
For Deutsche Bank on the swaps
action: Freshfields Bruckhaus Deringer;
Mark Hapgood QC of Brick Court; and
Timothy Howe QC of Fountain Court
For Unitech: Stephenson Harwood; and
John Brisby QC of 4 Stone Buildings
(Continued on page 52)
$63bn
in financial crisisrelated settlements
made by the six
largest US banks
litigation partner at Stephenson Harwood.
‘Generally you would have thought that
many banks are seeing less litigation now
as the economy and the markets improve,
but on the other hand, certain institutions
will no doubt be seeing more. For example,
the UK clearers who are facing payment
protection insurance (PPI) and interest rate
swap mis-selling claims or the larger banks
facing claims arising from international
regulatory investigations.’
As Gentin points out, there were cases that
arose immediately following the economic
crisis concerning issues like the collapse of
Lehman and then, after that, there was a
sense that the financial community was over
the worst of the claims. What has happened
since is that, as the economic climate has
remained depressed, those that were
*+&'#0&5''*+&'#0&5''-
13%
Increased
63%
Increased
63%
Decreased
No
37%
87% Decreased
37%
Claims for mis-selling
Claims for mis-selling
No
54%
No
54%
Yes
46%
Yes
46%
No
53%
No
53%
47%
Yes
47%
Nodifference
8%
16%
No 8%
Yes
76%
Yes
76%
LEGAL BUSINESS AND STEPHENSON HARWOOD
Spending on litigation increased in last 5 years?
Claims arising from defective legal documentation
Are you now seeing more or less litigation than in the period 2008-12? More litigation in-house?
Are you now seeing more or less litigation than in the period 2008-12?
Yes
27%
More litigation in-house?
If yes,
m
If yes, how
often
If yes, how often?
No
73%
Same
34%
HAS YOUR INSTITUTION’S SPENDING ON
ARE YOU BUDGETING FOR AN INCREASE
LITIGATION
INCREASED
OR DECREASED
IN
OR DECREASE
INforSPENDING
ON
Regulatory enforcem
Budgeting
increase?
SpendingClaims
on litigation
increased
in last year?
Considering using arbitration
Financial regulatory
climate
more
combative?
consequent
onLess
regulatory
investigations
THE LAST YEAR?
LITIGATION
FOR
THE
NEXT
12
MONTHS?
35%
Claims by hedge funds
Claims by hedge funds
Yes
13%
Yes
13%
Spending on litigation increased in last year?
No
51%
No
87%
No
87%
More
31%
Yes
49%
Decreased
37%
Increased
Increased
Decreased
63%
63%
37%
No
Financial regulatory climate more combative? Considering using arbitration m
difference
Yes Increase 16%
No 8%
No
47%
24%
53%
Yes
Same
76%
Decrease
61%
16%
Spending
on litigation
increasedSPENDING
in last 5 years?
Claims arising from defective legal documentation
yes, more
litigation? BEING HANDLED
ISIfMORE
LITIGATION
HAS
YOUR
INSTITUTION’S
ON
Would you consider
If yes,enh
now
seeing
more
or
less
litigation
than
in
the
period
2008-12?
Claims for mis-selling Are you
More
litigation
IN-HOUSE THAN
FIVEin-house?
YEARS AGO?
LITIGATION
INCREASED
DECREASED
Spending
on litigation
increasedOR
in last
5 years?
Claims arising from defective legal documentation
If yes, more litigation?
Increase
Would you consider ente
OVER THE LAST FIVE YEARS?
24%
Yes
Decreased
27%
16%
Same
Yes
Decreased
Decrease
61%
27%
16%
16%
Increased
Yes
Yes
No
No
84%
46%
47%
54%
53%
‘There was a lot of talk
about bank-on-bank
No
litigation but these
73%
No
73%
Increased
results suggest that
84%
No
banks have always
58%
Regulatory enforcement action handled in-house?
Budgeting for increase?
Claims consequent on
regulatory
investigations
Claims
by hedge
funds
Spending on litigation increased in last year?
ar
Financial regulatory climate more combative? Considering using
1. Would
tried to avoid those
Regulatory enforcement action handled in-house?
litigious
Budgeting
for
increase?
Claims consequent on regulatory investigations
Would
considec
type of cases
and that mis-selling (46%) and cases stemming from over 60% of respondents said that they always 1.litigious
Yes
wherema
tried to avoid litigation with other banks and
regulatory investigations (49%).
13%
consider
3. Woulfo
made greater efforts to settle these types of
As has been seen in the regulatory
hasn’t
changed
since
where
acti
extreme
Yes
No
disputes. Apart from a couple of headline
investigations into Libor and the controversy
3. Would
29%; 4.o
49%
51% the crisis.’ Edward Davis,
disputes in the last five years, such as HSH
over PPI and interest rate swaps, there has
extreme/ra
Yes
No
51%
Nordbank v UBS and RZB v RBS, there have
been a steady stream of suits arising from
29%; 4. Ne
been notably few cases. ‘There was a lot of
both areas (see box, ‘Recent key banking
talk about bank-on-bank litigation and a
cases from the crisis’, opposite). Claims
number of high-profile disputes but these
arising from defective legal documentation
waiting to see if asset values would rise are
that banks have always tried
were singled
out byon27%,
someincreased
way behind
now bringingClaims
claims
before
the
statutelegal
of documentation
Spending
litigation
in last 5 years?results suggest
arising
from
defective
If yes, more litigation?
Would you co
to avoid those type of cases and that hasn’t
the two most common sources of claims, but
limitations runs out. ‘The number of cases
Increase
changed since the crisis,’ says Davis.
it is a figure which Stephenson
Harwood’s
grew after the financial crisis but of more
24%
One respondent to the survey sums up
Davis points out as slightly surprising.
relevance Yes
is that these are not insignificant
Decreased
Increase
No
the prevailing attitude:
‘We are not afraid to
‘There was a line of thought at the start
cases,’ Gentin
16%
27% says. ‘The intensity of litigation
24%
Same
39%
Decreased
Decrease
litigate
against
other
banks
whenever
needed
of the crisis that there
might
be
more
claims
and regulatory activity that banks are
Yes
61%
No
16%
16%
but
it
all
depends
on
the
issues
involved
and
against
law
firms
as
transactions
and
their
currently facing is historic in nature.’ 61%
Same
Increased
39%
Decrease
No In terms of where claims are stemming
4.
the circumstances and the Yes
cost implications.
under scrutiny,’ he says.
84%documents come61%
16%
73%
61%
Increased‘While there may not be more claims against
We always try to find an amicable way of
from, our survey asked respondents if they
4.
dealing with the situation first but it does not
were seeing more from mis-selling; more 84% law firms as such, there is plainly a feeling
Yes
mean that
among many banks that poor documentation
claims being brought by hedge funds; more
No we avoid litigation.’
42%
When
were asked where they
is responsible for more disputes.’
from defective legal documentation; and
58%respondentsYes
No
expect
more
litigation
to come
from
over the
Where there hasn’t been an increase in
more claims consequent on regulatory
Regulatory enforcement42%
action
handled
in-house?
Budgetinglitigation.
for increase?
Claims
onclaims
regulatory
next 58%
three to five years, the spectre of
activity is in bank-on-bank
Just
investigations. Most
hadconsequent
seen more
forinvestigations
u
No
49%
87%
Stephenson
Harwood
Yes
No
49%
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December 2013/January 2014 Legal Business 51
INSIGHT: BANKING LITIGATION
RECENT KEY BANKING CASES (CONTINUED)
Harbinger Capital Partners v Andrew Caldwell
(the independent valuer of Northern Rock)
In the UK, the problems at Northern Rock were
the first sign of a crisis in Britain’s banking
system. When the bank was nationalised in
early 2008, Northern Rock shareholders lost
significant sums. The hedge fund Harbinger
Capital challenged the decision of the bank’s
independent valuer, Andrew Caldwell, not to
award compensation to the bank’s shareholders,
after he assessed the value of their shares.
In May 2013 the Court of Appeal ruled that
Caldwell was right in his decision, rejecting the
claimant’s assertion that its shareholding could
be worth as much as £400m. Harbinger lost a
first case in 2011 but opted to appeal the ruling
that its shares were worthless.
It was not the first case to question the
nationalisation of Northern Rock. In 2009
the hedge funds SRM Global and RAB Special
Situations brought a claim against the
Government but had their case thrown out.
For Harbinger: Brown Rudnick; Mark Phillips QC
of South Square; and Monica Carss-Frisk QC of
Blackstone Chambers
For Andrew Caldwell: Mayer Brown; and Mark
Howard QC of Brick Court
John Green and Paul Rowley v RBS
This was one of the first cases brought over
the alleged mis-selling of interest rate swaps.
Property developers Green and Rowley funded
their real estate business, in part, with financing
from The Royal Bank of Scotland (RBS). In
2005 they entered into a £1.5m base rate swap
agreement where if the base rate exceeded
4.83%, the bank paid the pair the difference
between the base rate (4.75% at the time of the
swap) and 4.83%, but if it fell below 4.83% they
would have to make payments to the bank. The
deal proved beneficial as rates remained high but
was hit by the economic crisis and the collapse of
interest rates in 2008. When Green and Rowley
enquired about ending the swap early in 2009,
they were told it could cost almost £140,000.
In their claim, the businessmen alleged that
RBS had given negligent advice and that if it
hadn’t been for the bank’s breach of duty they
would never have entered into the swap.
52 Legal Business December 2013/January 2014
Proceedings began in May 2011 before
reaching the Court of Appeal in October 2013
with the claims for negligent mis-statement and
breach of duty to give suitable advice dismissed.
Crucially Green and Rowley had no notes or other
documents detailing a 2005 meeting with the
bank to put the swap in place, while RBS had its
own account of the meeting.
In the original judgment, Judge Waksman
QC emphasised that it was a highly factsensitive case and therefore it has been viewed
as precedent setting for the slew of other
interest rate swap mis-selling claims to arise
since the crisis.
For Green and Rowley: Clarke Willmott; David
Berkley QC of St Johns Buildings
For RBS: Dentons; Andrew Mitchell QC of
Fountain Court
Zaki v Credit Suisse
This 2011 case was one of many to arise over the
alleged mis-selling of complex financial products
before the financial crisis, which quickly turned
sour after the collapse of Lehman. The claim was
brought by the widow of Mohamed Magdy Zeid,
an Egyptian businessman who, between 2003 and
September 2008, bought 39 structured products
from Credit Suisse’s UK operations. The claim
focused specifically on ten notes, all of which
were leveraged, that Zeid purchased between
early 2007 and June 2008. In October 2008
Credit Suisse issued a margin call and when Zeid
did not transfer the required additional collateral,
the bank liquidated the notes causing Zeid to
suffer a loss of almost $70m.
After Zeid died in 2010, the claim against
Credit Suisse was brought by his widow, Soheir
Ahmed Zaki. It boiled down to whether Credit
Suisse had made a personal recommendation to
buy the notes and, if that were the case, whether
the bank had taken reasonable steps to ensure
that its advice was suitable for Zeid. After the first
case ruled in favour of the bank the claim made
its way to the Court of Appeal, which upheld the
earlier decision.
For Zaki: Howard Kennedy; Robert Anderson QC
of Blackstone
For Credit Suisse: Freshfields Bruckhaus Deringer;
Adrian Beltrami QC of 3 Verulam Buildings
‘The intensity
of litigation and
regulatory activity
that banks are
currently facing is
historic in nature.’
Pierre Gentin,
Credit Suisse
u greater regulatory oversight once again
loomed large. On a scale of one to five, with
five being strong agreement, respondents
scored whether they anticipated more
litigation from four specific areas. Claims
consequent on regulatory investigations
received the highest average score at just over
3.5. None of the other three areas – claims
arising from formal insolvencies of zombie
companies, limitations expiring from 2007/08
credit crunch issues and refinanced loans
coming to maturity – scored above 2.8.
The unprecedented levels of regulatory
scrutiny and sanction imposed on the banks
(see box, ‘Growing some teeth’, page 48)
has been manifest by the number of highprofile hires from the regulatory arena
made by some of the biggest banking
institutions. For example, Lloyds Banking
+0018#6'#0&&'.+8'4
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LEGAL BUSINESS AND STEPHENSON HARWOOD
Group made a significant splash when it
hired the former general counsel (GC) of the
Financial Services Authority (FSA), Andrew
Whittaker, as its current GC in June 2012.
Other high-profile hires include Stuart Levey,
a former DoJ associate deputy attorney
general who joined HSBC as chief legal officer
in January 2012 in the wake of wholesale
investigations in the US and UK over the
bank’s money-laundering compliance
procedures. These investigations saw the
bank fined $1.9bn – then the largest ever bank
payout to date – over its inadequate antimoney laundering system a year ago. Barclays
also replaced outgoing GC Mark Harding
this summer with Bob Hoyt, GC and chief
regulatory affairs officer at PNC Financial
Services and the GC at the US Department of
the Treasury from 2006 to 2009, as well as a
former special assistant and associate counsel
at the White House.
Speaking to Legal Business recently,
Whittaker emphasised how crucial a
constructive relationship with the regulators
is to the banks, saying that although the
regulatory landscape is tougher, the response
shouldn’t be to push back – banks and
regulators should have shared objectives so
that when there’s a new regulatory initiative,
the banks will work with the regulators.
Meanwhile, former head of enforcement
at the FSA and now GC at PwC Margaret
Cole points out that regulators collectively
are making a point of sending a message
to financial institutions through their
enforcement activity – therefore it is essential
that in-house teams have individuals that are
adept at understanding financial watchdogs.
ON THE OUTSIDE
Increased regulatory oversight may be part of
the new dynamic for banks, but they do not
appear to be seeing a change in the volume
of claims from overseas jurisdictions. Just
under three-quarters (72%) of respondents to
our survey said there were no specific foreign
jurisdictions where they were seeing more
litigation. Of those that did report an increase,
the US was most regularly cited (67%),
followed by Europe (44%) and then Asia (22%).
To Stephenson Harwood litigation partner
Sue Millar, the number who highlighted Asia
was significant. ‘Now that the world economy
is increasingly moving east, you have to ask
whether that’s where more and more claims
are now going to come from.’
Clients also point to the rise of claims and
the tougher regulatory climate overseas.
u
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December 2013/January 2014 Legal Business 53
No
No
53%
53%
Yes
47%
47%
Yes
47%
No
53%
ed
ed
No 8% 16%
No 8%No
difference
16%
No 8%
Yes
Yes
76%
76%
Yes
76%
INSIGHT: BANKING LITIGATION
d
n in the period 2008-12?
n in the period 2008-12?
in the period 2008-12?
If yes, how often?
If yes, how often?
More litigation in-house?
More litigation in-house?
If yes, how often?
More litigation in-house?
Often
Often
33%
33%
HAS THE FINANCIAL REGULATORY
CLIMATEregulatory
BECOMEclimate
MOREmore
COMBATIVE
IN
Financial
combative?
Financial
regulatory
climate
more
combative?
THE LAST THREE YEARS?
n last year?
n last year?
last year?
Considering using arbitration more often?
Considering using arbitration more often?
Financial regulatory climate more combative? Considering using arbitration more often?
No difference
16%
No 8%
Yes
76%
d in last 5 years?
d in last 5 years?
If yes,
more
litigation?
IF YES, ARE
YOU
SEEING
MORE
If yes, more litigation?
LITIGATION AS A RESULT?
in last 5 years?
If yes, more litigation?
No
39%
se?
se?
e?
Would you consider entering lit funding/ATE in future?
Would you consider entering lit funding/ATE in future?
Regulatory enforcement action handled in-house?
IS REGULATORY
ENFORCEMENT
Regulatory
enforcement
action handled ACTION
in-house?
AGAINST YOUR BUSINESS EVER
HANDLED
WHOLLYaction
IN-HOUSE,
No Regulatory
enforcement
handledRATHER
in-house?
difference THAN EXTERNALLY?
No 8%
16%
ouse?
ncrease
ncrease
24%
24%
crease
Decrease
Decrease
24%
16%
16%
Decrease
16%
Yes
76%
Yes
42%
No
58%
If yes, how often?
No
No
39%
Often 39%Rarely
No 24%
33%
39%
No
No
58%
58%
OccasionallyYes
Yes
43% 42%
42%
84%
extreme/rare circumstances Shai Wade,
29%; 4. Never -54%
Stephenson Harwood
IF YES, HOW OFTEN?
Yes
Yes
61%
61%
Yes
61%
Yes
No
42%
ore combative? Considering using
58% arbitration more often?
54 Legal Business December 2013/January 2014
Rarely
Often
24%
33% Occasionally
Occasionally
overall has43%
been on the increase. When
43%
asked whether their institution’s spending
Occasionally
on litigation
had increased since 2008, 84%
said it had43%
gone up. In addition, just under
two-thirds (63%) responded that spend had
increased in the last year.
Although there has been much focus across
the market on driving a better deal with
Yes
external advisers, the response
to our survey
No
Yes
35%
indicated
that
litigation
remains
less price
No
65%
35%
sensitive65%
than many other practice areas. The
Yes
litigation
Noreputation of a law firm and a firm’s
35%
or individual
65% lawyer’s technical knowledge
of a product or sector were pinpointed as by
far the most important areas to consider when
appointing an external adviser.
On a scale of one to five, low hourly rates
emerged as the least important criteria,
scoring an average of 2.94 compared with a
firm’s reputation at 4.33 and a firm or lawyer’s
technical knowledge at 4.65. ‘It’s interesting to
see that historic relationships are important
‘Arbitration is cheaper
in some cases than
doing two appeals
in a national court
system. If arbitration
1. Would
consider
it for every
is sold
asconsider
being
1.
Wouldmatter
it for2.every
litigious
- 13%;
Would
litigious
matter
- 13%;
2. Would
consider
for
each
litigious
matter
cheaper
than
a-matter
first
for
each
where
as claimant
4%
1.consider
Wouldacting
consider
itlitigious
for every
where
acting
claimant
- 4%
3. Would
onlyasconsider
litigious
matter
- 13%;
2. in
Would
instance
decision,
3.
Wouldforonly
consider
extreme/rare
circumstances
consider
each
litigiousinmatter
reported increase in
extreme/rare
29%; acting
4. Never
-54% - 4%where
ascircumstances
claimant
then3.29%;
that’s
wrong.’
4. only
Neverconsider
-54%
Would
in
Would you consider entering lit funding/ATE in future?
Yes
61%
Rarely
Rarely
24%
24%
u ‘Historically other parts of the world like
EMEA and Asia have been significant
in
1.
1. less so than
our global litigation docket but
2.
2. years,
the US,’ comments Gentin. ‘In recent
1.
there’s been an increaseRarely
in litigation and
Often
24%
4.
2. 3.more
regulation in
Europe
and
Asia with
33%4.
3.
scrutiny of the industry.’
As the volume of litigation that the survey
4. seen has increased
respondents have
3. over
Occasionally
the last five years and
the
breadth
and depth
43%
of regulatory action has increased markedly,
it’s not surprising that litigation spending
No
65%
litigation spending
since 2008
and that hourly rates and the overall costs
proposal are not seen to be as important,’
Davis comments.
Of course, financial institutions are
not oblivious to the cost of a case – a law
firm’s overall costs proposal, including any
alternative costs arrangement, was considered
important, scoring 3.75 on average – and as
early pioneers of panels, banks have been
leaders in extracting greater value from the
law firm/client relationship. But as the balance
$+)#0&617)*
$+)#0&617)*
Yes
35%
LEGAL BUSINESS AND STEPHENSON HARWOOD
including give-backs, caps, tiers of discounts
and tranches of free work. The point is that
counsel have had to manage to targets just as
we do internally. And the result has been that
100%
we’re on track for lower 2013 external litigation
expenses in the US than we had in 2012.’
As well as banks like Credit Suisse taking
80%
steps to change how they use outside counsel,
law firms have been eager to offer a wide
variety of arrangements to satisfy banking
60%
clients. According to our survey, reduced
hourly rates remains firms’ favoured approach,
with 80% of respondents saying they had been
40%
offered a lower rate in the last 12 months and
70% saying they had requested one.
20%
The next most common offer from firms
was capped fees (78%) followed by blended
hourly rates (59%), bulk discounts (57%),
0%
budgets for each stage of the litigation (52%)
Rising numbers of formal Limitation periods expiring Claims consequent on
Refinanced loans
and caps for each stage of the litigation
insolvencies of
from 2007/08 credit
regulatory investigations
coming to maturity
(50%). ‘There’s been a lot of talk about the
'zombie' companies
crunch issues
death of hourly rates but there seems to be
a reluctance to grapple with other ways of
4
5
1
2
3
funding litigation and capping costs exposure,’
says Millar of the results. ‘My experience
is that we’ve tended to offer conditional fee
arrangements (CFAs) and with certain banks
the majority of its contentious cases – so
of power in that relationship has continued to
important
that works, there’s not really a downside to it.’
that the bulk ofMost
the bank’s
cases areconsiderations
handled
shift in the last five years the focus has been
‘We have seen little take-up of alternative
by a smaller group of firms, a move which
about more than just a firm’s fees.
100%
arrangements by banking clients – even
he says will
mean that the bank’s litigation
‘We’re now more demanding – all clients are
when we have been proactive in offering
spend is less this year than it was in 2012.
– and firms recognise that,’ Luker points out.
these in relation to disputes on which we
‘We’ve grown with our panel firms and the best Although he declines to name which firms
80%
are instructed,’ adds Davis. ‘There is clearly
make up that smaller group, the bank has
relationships are those where the line between
demand generally for law firms to come
in recent years instructed the likes of Davis
internal and external lawyers breaks down.’
up with alternative and more sophisticated
Polk & Wardwell,
Cravath,
Swaine
&
Moore,
For Gentin, the more hostile litigation and
60%
proposals for dealing with litigation, other
Milbank, Tweed, Hadley & McCloy and
regulatory climate has not meant that he has
than just a reduction in the hourly rate, and
Cooley on litigation matters.
had to expand his in-house litigation team
that is perhaps not yet something that the
‘In 2013, 40%
we negotiated highly structured
(he heads a group of around 45 litigators
banks have been insisting on.’
deals – with a small group of carefullyspread across the bank’s New York, London,
selected counsel – that were designed to cover
Zurich and Hong Kong offices). Instead, he
most of our20%
current and anticipated expense in FINDING AN ALTERNATIVE
emphasises getting the balance right between
2013,’ Gentin reveals. ‘The structures include
two important factors.
Banks obviously don’t lack options when
features that are more complex than is typical
looking to lower their litigation bills
‘We have to be very much focused on
u
0%
both internal and external costs,’ he remarks.
Low hourly rates Overall cost
Litigation
Firm or individual My institution's My own historic
‘But we also have to ensure that we don’t
proposal (including reputation
lawyer's technical
historic
relationship with
compromise externally or internally on
any alternative
of firm
knowledge of
relationship
the firm or
quality. It’s a nuanced exercise in terms
cost arrangement)
product or sector with the firm or individual lawyer
of being attentive to who you need both
indvidual lawyer
internally and externally.’
1
2
3
4
5
Last year Gentin led an extensive review
of Credit Suisse’s external litigation advisers
in the US – the jurisdiction where it still sees
ARE YOU ANTICIPATING MORE LITIGATION OVER THE NEXT THREE TO FIVE YEARS
Anticipating
AS A RESULT
OF ANYmore
OF THElitigation?
FOLLOWING? (1= LEAST LIKELY; 5=MOST LIKELY)
5
4
3
2
1
The unprecedented levels of regulatory scrutiny and
sanction imposed on the banks has been manifest by
the number of high-profile hires from the regulatory
arena made by some of the biggest banking institutions.
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December 2013/January 2014 Legal Business 55
Decreased
Decreased
37%
Increased
63%
Increased
63%
No
53%
No
53%Yes
47%
47%16%
No 8%
No 8%
Yes
76%
Yes
76%
37%
INSIGHT: BANKING
LITIGATION
Claims for mis-selling
mis-selling
Are you now seeing more or less litigation than in the period 2008-12?
Are you now seeing more or less litigation than in the period 2008-12?
If yes, how often?
More litigation in-house?
More litigation in-house?
If yes, how often?
O
3R
Often
33%
u but the results from our survey would
funding is typically used on the claimant
side and banks often find themselves as the
suggest that they are not embracing some
ARE YOU CONSIDERING USING
a case, the
uptake
might
be
of funds
the newer, more innovative
Claims by hedge
Spending onfunding
litigation increased indefendant
last year? inFinancial
OFTEN
THAN
Considering usingMORE
arbitration
more
often?FIVE
regulatory climate more combative? ARBITRATION
expected to be low.
techniques. Third-party-litigation funding,
YEARS AGO?
edge funds
Spending on litigation increased in last year?
Financial
combative? Considering using arbitration more often?
On theregulatory
flip side,climate
banksmore
are finding
a financing mechanism that has only begun
themselves increasingly dragged into more
to get significant traction in the last five
appearances in court because of litigation
years, remains largely unpopular with major
Yes
funding as would-be claimants can rely on
financial institutions.
35%
the deeper pockets of hedge funds and other
Just 13% of those who responded to
No
alternative investors to take the banks all the
our survey said that they had entered into
65%
way in a dispute (see ‘How to win cases and
a third-party litigation funding and/or an
influence people’, page 58). A recent example
after-the-event (ATE) arrangement in the
is Harbour Litigation Funding bankrolling
last five years. Asked if they would consider
a claim against Barclays, alleging the bank
such an arrangement in the future, 54%
Spending on litigation increased in last 5 years?
from defective legal documentation
If yes, more litigation?
Would
consider entering
lit funding/ATE
WOULD
YOUyouCONSIDER
ENTERING
INTO in future?
Spending on litigation increased in last 5 years?
e legal documentation
If yes, more litigation?
A
LITIGATION
FUNDING/ATE
INSURANCE
Would you consider entering lit funding/ATE in future?
Banks obviously don’t lack options when looking to
lower their litigation bills but the results from our
survey would suggest that they are not embracing some
of the newer, more innovative funding techniques.
AGREEMENT IN THE FUTURE?
1.
2.
4.
3.
misused confidential information in its 2010
replied never, with 29% saying they
Regulatory enforcement
handled
takeover of Tricorona.
The £164maction
claim
has in-house?
would
only
consider
it
in
extreme
or
Budgeting
for
increase?
nsequent on regulatory investigations
1. Would consider it for every
been
brought
by UK trading
and investments
rare circumstances.
Regulatory
enforcement
action handled
in-house?
Budgeting for increase?
litigious
matter - 13%; 2. Would
regulatory investigations
firm CF Partners, which alleges that Barclays
Firms are clearly aware that banks are
1. Would consider
for every
1. Woulditconsider
it litigious
for everymatter - 13%;
consider
formatter
each litigious
used confidential information it supplied to
reluctant to consider third-party funding
2. Would consider
each- litigious
where matter
litigious for
matter
13%; 2. Would
where acting as claimant - 4%
the bank when requesting funding for its
or ATE – in our survey only 15% had been
acting as claimant
4%;each
3. Would
only
consider in
consider-for
litigious
matter
3. Would only consider in
where
acting as claimant
own bid for Tricorona.
offered third-party funding, while 11% had
extreme/rare
circumstances
- 29%;-4.4%Never -54%
extreme/rare circumstances 3. Would only consider in
been offered ATE. Given that third-party
But third-party funding also poses wider
29%; 4. Never -54%
extreme/rare circumstances challenges to banks. ‘It’s not something we would
4. five
Neveryears
-54% ago. The same
more often29%;
than
ordinarily use,’ says RBS’s Luker. ‘We want to
percentage responded that their institution
retain full control over any litigation that we’re
tends to avoid arbitration, with price/value
involved in. There are collateral reputational
(56%) and perceived lack of speed (44%) the
issues that are very important to us.’
leading reasons for avoiding it.
The question is whether this attitude
‘Arbitration is cheaper in some cases than
will soften as third-party funding and ATE
Increase
doing two appeals in a national court system,’
become more widespread. ‘Banks’ attitude to
24%
third-party funding potentially could change, comments Stephenson Harwood arbitration
1.
Decreased
Increase
No Millar.
partner Shai Wade. ‘If arbitration is sold as 2.
I don’t see why it wouldn’t,’ suggests
16%
24%
Same
1.
Decreased
39%
Decrease
‘It’s
surprising that things
No like buying ATE to Yesbeing cheaper than a first instance decision,
61%
16%
2.
16%
Same
more interest as 61%then that’s wrong.’
39%
Decrease cap exposure hasn’t attracted
Increased
Yes
61%
‘The results suggest that4.there are still
a cost management tool.’
16%
84%
3.
61%
Increased
concerns about 4.
things like quality of arbitrators
While financial institutions have been
84%
3.
and price and there are perhaps other issues
slow to catch on to new methods for funding
Yes
like non-enforceability in many jurisdictions of
litigation, our survey reveals
No that they also
42%
hybrid or one-way clauses, which banks have
remain less than convinced
the merits of
58%onYes
No
used quite widely,’ comments Davis on banks’
arbitration. A little over a third42%
(35%) said
58%
reluctance to arbitrate.
that they were considering using arbitration
24%
of banks are
budgeting for an
increase in litigation
spending next year
10%'69+%'#0&6*4+%'
56 Legal Business December 2013/January 2014
Occasio
43%
No
65%
4
3
2
LEGAL BUSINESS AND STEPHENSON HARWOOD
1
iods expiring Claims consequent on
08 credit
regulatory investigations
issues
3
4
Refinanced loans
coming to maturity
5
WHAT ARE THE MOST IMPORTANT CONSIDERATIONS IN DECIDING WHICH
FIRM(S) TO INSTRUCT ON LITIGATION MATTERS?
MostIMPORTANT;
important 5=MOST
considerations
(1= LEAST
IMPORTANT)
100%
5
80%
4
60%
3
2
40%
1
20%
0%
Low hourly rates
Overall cost
proposal (including
any alternative
cost arrangement)
Litigation
reputation
of firm
1
2
3
Although the results from our survey
suggest that litigation remains the favoured
form of dispute resolution for banks – or
perhaps the least worst option – arbitration’s
appeal may grow as financial institutions
grow their business in emerging markets
where the local court system may not be
the preferred venue to settle disputes.
In addition, the creation of the Panel of
Recognised International Market Experts
in Finance (or PRIME Finance), a specialist
arbitration centre for the settlement of
complex financial disputes established in
2012 by Lord Woolf and former Allen &
Overy partner Jeffrey Golden, reflects a
growing acceptance that traditional litigation
doesn’t always offer the best method of
settling banking disputes.
And even if arbitration isn’t the best
option, banks are prepared to consider some
form of alternative dispute resolution. ‘We’ve
always been supporters of ADR,’ insists
Luker. ‘It’s hard to argue against it if there’s
Firm or individual My institution's My own historic
lawyer's technical
historic
relationship with
knowledge of
relationship
the firm or
product or sector with the firm or individual lawyer
indvidual lawyer
4
5
a means of satisfactorily settling a dispute
without the cost and time of going to court.’
Gentin also underlines the benefits
of using mediation. ‘It’s a flexible way for
in-house counsel to discuss potential
resolution in a neutral format,’ he says.
‘We have found mediation a good tool to
send signals in cases, gain information and
explore settlement.’
Although the survey points to an increase
in litigation and a clear rise in litigation
spending, the last five years have not seen
banks shift their attitudes on ADR or more
sophisticated forms of billing. The irony is, of
course, that banks remain arguably the most
sophisticated users of legal services as they
have pioneered the use of panels and led the
way on leveraging their buying power with
external advisers.
As Stephenson Harwood’s Millar
emphasises, banks may have their budgeted
legal spend but what they value over
everything is certainty and, ‘there may be no
‘Banks are probably
the most sophisticated
litigators and they
look at matters in
purely commercial
terms but that is not
necessarily reflected
in their approach to
funding litigation.’
Sue Millar,
Stephenson Harwood
signs that greater flexibility will reduce costs
and bring more certainty.’
‘Banks are probably the most sophisticated
litigators and they look at matters in purely
commercial terms but that is not necessarily
reflected in their approach to funding
litigation,’ she adds.
With banks’ litigation coffers continuing to
swell as regulatory investigations and claims
mount, the need to view disputes in purely
commercial terms has never been more
pressing. LB
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December 2013/January 2014 Legal Business 57
When experience counts
At stephenson harwood, we have one of the most respected litigation
teams in the city of London.
We act for clients across the financial sector including investment
banks, retail banks, funds, asset managers, brokers, regulators and
individuals – and meet their most complex, entrenched and sensitive
problems with creative and robust solutions.
If you would like to know more, call Sue Millar on 020 7809 2329
or Edward Davis on 020 7809 2327.
44 Legal Business December 2013/January 2014
www.shlegal.com