Editors' Blog

Sympathy for Silk Street

Posted 27/06/2008 by Georgina Stanley

“It’s a disgrace” may not be the first words you’d associate with a commercial decision by a bank but the expression neatly sums up opinion across the Square Mile regarding JP Morgan’s decision to blacklist Linklaters thanks to its role litigating against Bear Stearns.

Forget schadenfreude - Linklaters may not be the kind of firm to typically elicit much sympathy from rivals but JP Morgan’s strong-arm tactics have rekindled the solidarity usually well buried in City lawyers’ hearts.

After all, Linklaters had accepted the instruction from Barclays Capital months before the stricken lender collapsed as a result of its exposure to the plunging credit market and months before JP Morgan in March agreed to buy the bank for a fraction of its previous value.

Linklaters had also been open with JP Morgan’s legal team about the litigation at the time of the takeover. Initially, Linklaters had the impression that JP Morgan was taking a pragmatic stance; it is widely accepted that Linklaters’ position, while commercially awkward, was not a legal conflict. But, apparently, when the bank’s executive team became aware of the issue they took a rather less charitable view. Hence Linklaters being asked to stand down or else.

Given US bar rules and its client commitments to Barclays, that gave Linklaters little option but to regretfully tough it out and see itself, temporarily at least, frozen out by one of its top banking clients.

To drive home the point, JP Morgan general counsel Stephen Cutler is believed to have sent round a strongly-worded email making it clear that Linklaters was not to be instructed under any circumstances until further notice.

While partners are trying to remain philosophical there’s no denying they feel hard done-by. But there is also widespread support for senior partner David Cheyne’s handling of the affair, which is seen as striking the right note of pragmatism with backbone.

While it could be argued that Linklaters was a touch naïve in taking the original case – US observers used to Wall Street tribalism are far less surprised by JP Morgan’s stance than London lawyers – the bottom line is that Linklaters’ calculated risk in litigating against a bank was hijacked by the impossible-to-predict events of Bear Stearns’ fire sale.

But all the sympathy in the world will be little consolation to Linklaters as the firm comes to terms with losing a client estimated by one rival to be worth in the region of £20m annually.

While JP Morgan uses a range of law firms, Linklaters is its most regular adviser outside the US. The London finance team has built a strong relationship with the bank and though Gideon Moore has the closest ties, the work feeds the rest of the leveraged finance team, including Nick Syson, Adam Freeman and Stephen Lucas. JP Morgan’s securities division has also been a regular client to Linklaters’ international offices, where the firm has handled several big ticket capital market instructions.

It’s obviously a bitter blow for a leveraged finance team already wrestling with the pronounced slowdown in Europe’s buy-out market. Some rivals even suggest the firm may have to make redundancies, though the firm strongly refutes this.

Set against this, Linklaters can rely on a good spread of quality clients, among them Citi, Royal Bank of Scotland, Merrill Lynch and Barclays and a finance team that has proved energetic and consistently upwardly-mobile in recent years.

A further ray of sunshine for Linklaters is a feeling that the relationship with JP Morgan is too developed to be severed for a long period of time. So where previous litigation-related rows like Freshfields being blackballed by Citibank and Slaughter and May falling foul of Merrill Lynch have typically led to long spells in the wilderness, there is a general expectation that Linklaters is instead in for a short, sharp shock.

After all, it’s very disruptive for a major bank to pull the plug on a primary adviser, especially in the City where, unlike New York, heavyweight finance work is dominated by just a handful of firms.

All in, the neutral observer might wonder what JP Morgan’s fit of pique has achieved, aside from generating the aforementioned sympathy for Linklaters and delivering a massive boost to the swelling band of litigation specialists angling to secure post-crunch claims against banks.

georgina.stanley@legalweek.com