Legal Village

Economic crisis shifts Asian spotlight to litigation

Posted 23/12/2008 by Anthony Lin

The story of international law firms in Asia has long been all about transactions - infrastructure financings, foreign investment and, especially in recent years, blockbuster public offerings of mainland Chinese companies. But with capital markets in Hong Kong, Tokyo and Shanghai now as moribund as those in London or New York, a number of firms are finding an unexpected bright spot in the region: litigation.

Linklaters announced last week it would relocate senior litigation partner Tom Lidstrom from London to Hong Kong in January, and other firms are also gearing up for an Asian disputes uptick as well.

"Contentious work is increasing across the board," says Mark Johnson, head of the Asian dispute resolution group for Herbert Smith in Hong Kong. "We are receiving a growing number of instructions from global and regional financial institutions. Much of this is directly or indirectly related to the credit crisis, including compliance issues and internal investigations."

A rash of litigation work accompanying an economic downturn would hardly raise eyebrows in the United States, but in Asian business cultures, with their emphasis on longterm relationships, disputes requiring legal intervention are an aberration even in the worst of times. But the festering scandal over the sale in Hong Kong and Singapore of structured notes linked to Lehman Brothers may prove the catalyst for both billions of dollars in claims and for an overhaul of financial regulation in the region.

Although in the United States and Europe, structured finance products such as the now-familiar mortage-backed securities were strictly the province of investment professionals and large institutions, similar products were marketed in Hong Kong and Singapore to individual investors, some of extremely modest means. Almost $2 billion of these so-called "minibonds" were sold in Hong Kong to over 40,000 people, and the collapse of Lehman, which acted as a guarantor of sorts for a significant portion of the notes, has resulted in massive losses for many of these investors.

Much of the anger has been directed at the several regional banks, such as Bank of China and Bank of East Asia in Hong Kong or DBS Bank in Singapore, that actually marketed and distributed the minibonds to consumers. Many investors have claimed they were misled about the risks and subject to high-pressure sales tactics by bank employees. The issue has become a political hot potato, as protests outside of bank offices and stories about fishermen and widows left destitute by minibond losses have become staples of news coverage in the region.

For law firms, the minibond scandal is providing plenty of work. Hong Kong's Securities and Futures Commission is investigating the scandal, as is the Legislative Council of the self-governing Chinese territory. Though they decline to identify their clients, both Herbert Smith and Freshfields Bruckhaus Deringer are representing financial institutions subject to these investigations, as well as to individual claims by investors. Linklaters has the plumb assignment of representing the former Lehman in claims arising outside the United States.

Even representing individual investors may prove lucrative to certain firms. The Hong Kong Monetary Authority is paying certain law firms to represent individual investors in mediation over claimed losses. Under the scheme, investors for whom mediation fails will also have the option of binding arbitration. Several local lawyers say Mayer Brown JSM, the product of the year-old merger between Mayer Brown and local giant Johnson Stokes & Master, is participating in the mediation scheme by representing minibond investors, but the firm declines to confirm this.

Despite the mediation scheme, some lawsuits have already been filed, and there have been calls in some quarters for legislation authorizing U.S.-style class action suits to be brought in Hong Kong court. Simultaneously, some investor groups are pushing for a class action to be brought in the U.S. against Lehman and some of the distributing banks, though the litigation stay occasioned by Lehman's Chapter 11 bankruptcy filing will likely present a formidable barrier to such a suit.

Herbert Smith's Johnson is among those who see the minibond scandal leading to a greater push for regulation in Hong Kong, which has traditionally been far more laissez-faire than either London or New York, and other major Asian financial centers. He sees his firm, which in Asia has an unusually high 40-to-60 ratio of litigation to corporate work, as particularly well positioned to weather the downturn.

But Richard Chalk, the Asia dispute resolution head for Freshfields, isn't so sure that litigation-averse Asia is really about to change. He notes the Hong Kong government has been putting considerable pressure on banks, most of whose balance sheets are far healthier than those of their Western counterparts, to buy back minibonds and settle claims. He envisions the whole scandal eventually being quietly resolved behind the scenes in classic Hong Kong style. "I don't really believe we're going to see a major regulatory shakeup," he says.

The litigation uptick has opened a gulf somewhat between those international firms, mostly British, with substantial litigation practices in the region and those, largely American, with minimal or no capability. The Asia managing partner of one large U.S. firm says it's certainly true that those firms without any litigation or arbitration practice are now especially idle. But he said it was unlikely that most U.S. firms, coming to Asia for corporate work, would regard Asian litigation as any kind of substitute or hedge. "It's a nice piece of work," he says of Linklaters' Lehman role, "but how many of those are there?"

Even litigator Chalk says the global firms' presence in Asia ultimately depends on their corporate practices. "It's been nice to feel a bit smug lately, looking around at lots of people who aren't too busy," he says. "But, in the end, it is really about corporate work here."

This article first appeared on The Am Law Daily blog on Americanlawyer.com.