An Insight Special on Banking Litigation INSIGHT: BANKING LITIGATION

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

f you needed confirmation of just how Business worked with Stephenson Harwood challenging the litigation climate is for to canvass in-house lawyers at the major many of the world’s banks, then JPMorgan banks. We wanted to assess a range of topics, Chase’s results for the third quarter including how the volume and sources of provided it, in all their billion-dollar detail. litigation have varied in the last five years; IAnnouncing a $400m loss for Q3 in October, how banks’ litigation spend has changed; the bank revealed that it had set aside $23bn their approach to bringing cases against other for litigation costs arising from a series of banks; their views on arbitration and third- regulatory investigations, resulting litigation party litigation funding; and their approach and economic crisis-related suits. to selecting outside lawyers, gathering ‘We continuously evaluate our legal responses from more than 100 senior banking reserve but in this highly charged and in-house counsel. unpredictable environment, with escalating To many, both inside and outside of the demands and penalties from multiple banks, the shift in environment has been government agencies, we thought it was profound. ‘It’s changed in an unrecognisable prudent to significantly strengthen them,’ way,’ admits one head of litigation at a commented JPMorgan’s chief executive leading bank. ‘It’s been driven by so many Jamie Dimon in a statement. By way of regulatory investigations and you now have comparison, the bank’s litigation fund so many regulatory agencies competing to stood at $3bn in 2010. issue the biggest, baddest fines.’ Although JPMorgan is one of several ‘There’s been a remarkable shift in the international finance houses to face mounting way that people view banks in the last five legal costs its travails, in particular, reflect or six years,’ asserts Mark Howard QC, a the challenges facing the banking sector. barrister at Brick Court Chambers. ‘Before Today’s bank executives and senior in- the economic crisis, most people started from house counsel face a complex web of the point that banks were straightforward investigations fuelling claims arising out of and honest but now the whole climate has the financial crisis and more recent scandals, changed. Banks’ reputations have been new regulatory oversight and tougher tarnished, not only in the eyes of the public laws proposed by the likes of the Financial and the press, but also in the eyes of judges.’ Services (Banking Reform) Bill in the UK and With cases coming to light over the Dodd-Frank in the US. London Inter-Bank Offered Rate (Libor) To assess how this new environment scandal, and more expected from the is affecting the finance community, Legal brewing investigation into foreign u

46 Legal Business December 2013/January 2014 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 Frank Act that enhanced its regulatory arsenal. As a result, in the last two and prevent much of the fallout from the banking crisis, it’s fair to say that years the CFTC has opened a record 800 investigations and in 2012 obtained ever since the 2008 collapse of Lehman Brothers they have been attempting orders imposing more than $931m in sanctions. to redress the balance. The regulatory landscape that financial services In New York the new Department of Financial Services (DFS), formed in 2011 firms face has never been more challenging. As Margaret Cole, the former to improve oversight of the Empire State’s numerous financial institutions, head of enforcement at the Financial Services Authority (FSA) and now has also hit the headlines for its regulatory zealotry. In August 2012, before general counsel (GC) at PwC, recently told Legal Business, the regulatory federal authorities could reveal their hand, the DFS announced allegations that framework that impacts the business in-house lawyers work in will get Standard Chartered had been involved in facilitating hundreds of billions of tougher. According to one respondent: ‘History suggests that there are more dollars’ worth of deals for Iran, in contravention of US sanctions. The UK-based regulators now that can trace an institution’s past actions, so it’s obviously a bank was ultimately fined $340m by the New York watchdog on top of a $100m more combative environment now than before.’ fine from the Federal Reserve and a $227m penalty from the DoJ. Our survey asked several questions relating to the regulatory environment For regulatory investigations and litigation to arise directly out of the that banks now operate in and the responses economic crisis, such as over the selling of largely highlighted the far tougher approach poor quality mortgage securities, was not from watchdogs. Just over three-quarters of surprising. A cause for greater concern in the respondents said that the regulatory climate banking community, however, has been the had become more combative in the last three number of investigations to emerge that are years, with 61% saying that they are seeing largely unrelated to the crisis, such as Libor more litigation as a result. and the unfolding scandal around foreign Banks are quickly becoming accustomed to exchange rates. a new regulatory structure in both the UK and ‘I don’t think there’s a single reason overseas, most notably in the US. Given that why we’re seeing more activity, there’s the successors to the UK’s FSA – the Financial simply a lot more scrutiny of the industry Conduct Authority (FCA), the Prudential than before,’ comments William Sweet, Regulation Authority and the Bank of © REX/Sipa Press head of Skadden, Arps, Slate, Meagher England’s Financial Policy Committee – were & Flom’s financial institutions regulation only formed in April 2013, the market is still and enforcement group. Plus there’s been coming to terms with how the new regulatory structure will work in practice. a notable shift at the head of America’s flagship markets regulator, the However, the scandal over the manipulation of Libor, a key financial market Securities and Exchange Commission (SEC). indicator based on the rate at which banks are prepared to lend to one another, Since she took over as head of the SEC, Mary Jo White has indicated that has certainly given the FCA an early opportunity to prove its regulatory mettle. she is prepared to get tougher on the financial industry than some of her In October, the watchdog announced that it had fined the Dutch financial predecessors. As a former Debevoise & Plimpton litigation partner and before institution Rabobank £105m for Libor-related misconduct. That fine was the that as US Attorney for the Southern District of New York, she might have been third largest ever issued by the FSA or FCA, and was the fifth penalty levied by expected to bring a litigator’s zeal to enforcement when she picked up the UK regulators as part of the ongoing investigation (prior to its abolition the FSA reins at the SEC in April 2013. Where she has proved particularly aggressive is announced fines against Barclays, UBS and The Royal Bank of Scotland). in questioning whether banks should routinely be allowed to neither admit nor In a release announcing Rabobank’s fine, Tracey McDermott, the FCA’s deny wrongdoing in settling with the Wall Street regulator. director of enforcement and financial crime, commented: ‘Firms should be in In a speech she gave in September, White suggested that in many cases no doubt that the spotlight will remain on wholesale conduct and we will hold a no-admit-no-deny approach was still best, but she added: ‘Sometimes them to account if they fail to meet our standards.’ more may be required for a resolution to be, and to be viewed as, a sufficient The Libor scandal has also showcased the increased co-operation punishment and strong deterrent message.’ between international regulators, a trend which has been evident for several That change of tack is clearly resonating with the litigation Bar in the US. years. In its investigation into Rabobank, the FCA worked closely with ‘Mary Jo White has definitely sent a message that she’s going to be more regulators in the Netherlands and Japan as well as the Department of Justice aggressive. But it will take more time for the implications of that to shake out (DoJ) and Commodity Futures Trading Commission (CFTC) in the US. – whether it will mean more enforcement actions, more stringent settlement One of the features of the new tougher climate in the States has been the demands and penalties, more trials, or different enforcement priorities,’ emergence of newly empowered regulatory bodies such as the CFTC. For a insists Stephen Ascher, co-chair of Jenner & Block’s securities litigation long time seen as a fairly sleepy overseer with few enforcement powers, the and enforcement practice. More time under a regulatory cloud like this is Commission has been reinvigorated, in part thanks to provisions in the Dodd- something that most banks would undoubtedly prefer to avoid.

9GNGFVJGUWEEGUUHWNCRRNKECVKQPHQTLWFKEKCNTGXKGYDTQWIJVD9GNGFVJGUWEEGUUHWNCRRNKECVKQPHQTLWFKEKCNTGXKGYDTQWIJVD[4[4CYCYNKPUQP*WPVGTVTWUVGGUNKPUQP*WPVGTVTWUVGGU CPF8CPF8KPEGPV6KPEGPV6EJGPIWK\HQNNQYKPIVJG5GTKQWU(EJGPIWK\HQNNQYKPIVJG5GTKQWU(TCWF1HƂEGoUFCTCWF1HƂEGoUFCYPYPTCKFQHVJGKTEQTRQTCVGTCKFQHVJGKTEQTRQTCVG 48 Legal Business December 2013/January 2014 &#+�&)1.+#8+�&)1.+#6*6* RTGOKUGUsCPFVJKUJCUTGUWNVGFKPEJCPIGUKPVJGYCRTGOKUGUsCPFVJKUJCUTGUWNVGFKPEJCPIGUKPVJGYC[VJCVUGC[VJCVUGCTEJYCTTCPVUCTGQDVTEJYCTTCPVUCTGQDVCKPGFCKPGF CPFGZCPFGZGEWVGFGEWVGF Same More Same More 34% Mor31%e Same34%Same 31%More LEGAL BUSINESS AND STEPHENSON HARWOOD 31% 34%34% 31% Less Less 35% Less35%Less No No 35%35% di erence di erencNo No e Yes di erenc16%e No Yes No 8%di erenc16% e No Ye47s % No 8%16%16% No53% 47Ye%s No 8% 53%No 47% No 8% Yes 53% 47% Yes 53% 76% Decreased Increased Yes76 Y%es Decreased Increased 37% Increased63% 76%76% DecreasedDecreased37% Increased63% 63% 37%37% 63% ARE YOU EXPERIENCING MORE OF THE FOLLOWING?Claims for mis-selling Are you now seeing more or less litigation than in the period 2008-12? More litigation in-house? If yes, how often? Claims for mis-selling Are you now seeing more or less litigation than in the period 2008-12? More litigation in-house? If yes, how often? CLAIMSClaims FORClaims MIS-SELLINGfor mis-sellingfor mis-sellingAre Areyou younow now seeing seeing more more or less or less litigation litigation than than in the in theperiod period 2008- 2008-12? 12?MoreMore litigation litigation in-house in-house? ? If yes,If yes, how how ofte often? n?

Rarely Often Rarely Often Rarely24% No Yes Yes 33% 24Rarely% No Yes Ofte33Often% n 24% 54% Ye46%s No 46% 24% No54%No 46%Yes 33%33% 46% 54% 54%54% 46% Occasionally Occasionally 43% OccasionallyOccasionally43% 43%43% Claims by hedge funds Spending on litigation increased in last year? Financial regulatory climate more combative? Considering using arbitration more often? Claims by hedge funds Spending on litigation increased in last year? Financial regulatory climate more combative? Considering using arbitration more often? CLAIMSClaims BY HEDGE by hedge FUNDS funds Spending on litigation increased in last year? Claims by hedge funds Spending on litigation increased in last year? FinancialFinancial regulato regulatory climatery climate more more combativ combative? e?ConsideringConsidering using using arbitration arbitration more more ofte often? n? Yes Yes Yes 13% Ye13%sYes 13% JPMorgan’s Jamie Dimon testifies before a Senate Committee in Washington DC © REX/KeystoneUSA-SUMA 13%13% Yes No Yes u No Ye35%s exchange trading, those reputations are the industry of the litigations filed after the No No No65% 35%Yes No 65%No 35% going to take some polishing. financial crisis.’ 87% 87% 65% 35% No87No% 65% While much of the recentMor focuse has been Same 87%87% ON THE RISE on the myriad34% claims facing31% JPMorgan and in Not surprisingly, given the obvious change particular its November $13bn settlement with Claims arising from defective legal documentation Spending on litigation increased in last 5 years? Claims arising from defective legal documentation Spending on litigation increased in last 5 years? If yes, more litigation? in climate, our survey showed an increase the Department of Justice (DoJ) in the US over CLAIMS ARISING FROM DEFECTIVE If yes, more litigation? Would you consider entering lit funding/ATE in future? in contentious cases involving banks. Of sales of mortgage securities,Less it is by no means ClaimsClaims arising arising from from defective defective legal legal documentation documentation SpendingSpending on litigation on litigation increased increased in last in last 5 years 5 years? ? If yes, more litigation? Would you consider entering lit funding/ATE in future? LEGAL DOCUMENTATION If yes, more litigation? Would you consider entering lit funding/ATE in future? the respondents, 59% said that they were the only bank to face35% paying out billions. Would you consider entering lit funding/ATE in future? Yes No involved in more litigation from 2008 to 2012 According to data firm SNL Financial, in Yes 27% di erence Ye27%sYes than in the previous five years. ‘The sharp March the six largest US banks, including Yes 16% 27%27%No No 8% Yes increase in lawsuits as a result of the 2008 JPMorgan and Bank of America, had racked 47% crisis makes it very apparent that litigation up $63bn in settlements related toNo the 53% 27% No Yes 73% is almost inevitable,’ said one banking GC in financial crisis and scandals suchNo73% as Libor Increased No 76% response to the survey. since 2010.Decreased With JPMorgan’s mounting73%73% costs, No ‘Yes, we’ve seen an increase in litigation in that total could37% easily pass63 $100bn.% u 73% the financial sector,’ confirms William Luker, head of litigation at The Royal Bank of Scotland Regulatory enforcement action handled in-house? (RBS). ‘In the US, in particular, regulatory ARE YOU SEEING MORE OR LESS Claims consequent on regulatory investigations Budgeting for increase? Regulatory enforcement action handled in-house? Claims consequent on regulatory investigations Budgeting for increase? 1. Would consider it for every authorities and investors have shown increased LITIGATION NOW THAN IN THE CLAIMS CONSEQUENT ON REGULATORY Budgeting for increase? RegulatoRegulatory enforcementry enforcement action action handled handled in-house in-house? ? 1. Would consider it for every Claims for mis-selling Are you now seeing more or less litigation than in the period 2008-12? ClaimsMoreClaims consequent litigation consequent in-house on regulato on regulato? ry investigationsry investigations If yes, how ofteBudgetingn? for increase? litigious matter - 13%; 2. Would appetite to pursue litigation against banks. PERIOD 2008-12? 1. Wlitigious1.ould Would consider matt considerer it- 13%;for it ever for 2. Wevery ouldy INVESTIGATIONS consider for each litigious matter What we haven’t necessarily seen is an uptick litigiousconsiderlitigious matt for matter each- 13%;er -litigious 13%; 2. W 2.ould mattWould er where acting as claimant - 4% in banks suing one another.’ considerwherconsidere foracting each for as each litigious claimant litigious matt - 4% matter er wher3. We ouldacting only as claimantconsider -in 4% With many predicting a ‘tsunami’ of 3.wher Woulde acting only consider as claimant in - 4% More Yes Rarely 3. extrWouldeme only/rar econsider circumstances in - litigation after the 2008 collapse of Lehman Same No Yes extr3. emeWould/rar onlye cir considercumstances in - 31% No 49% Yes Often 24% extr29%;eme 4./rar Nevere circumstances -54% - Yes 34% No51% Ye49sYe%s 29%;extr eme4. Never/rare -54%circumstances - NoBrothers, that number might have been 51%No No 49% 33% 29%; 4. Never -54% 46% 51% 49%49% 29%; 4. Never -54% 54%expected to be higher. But as some point 51% 51% out, it’s dangerous to become too focused on Less statistics. ‘You have to be careful not to rely 35% Occasionally too much on numbers alone,’ warns Credit 43% Suisse’s global head of litigation, Pierre Gentin. ‘The real storyClaims is the by hedge significance funds for Spending on litigation increased in last year? Financial regulatory climate more combative? Considering using arbitration more often? Increase Increase 24% Decreased IncreaseIncrease24% 1. Decreased No 1. Yes 16% 24%24% No 2. DecreasedDecreased16% Same 1. 1. 2. 13% Same Decrease No39% 16% 61% Decrease 39%No Yes 2. 9GNGFVJGUWEEGUUHWNCRRNKECVKQPHQTLWFKEKCNTGXKGYDTQWIJVD9GNGFVJGUWEEGUUHWNCRRNKECVKQPHQTLWFKEKCNTGXKGYDTQWIJVD[4[4CYCYNKPUQP*WPVGTVTWUVGGUNKPUQP*WPVGTVTWUVGGU16% Same61Same% 16% 39% Yes 2. Increased DecreaseDecrease16% 39% Ye61s% Increased 61%61% 61Ye%s 4. 84% 16%16% Yes 61% 4. 3. CPF8CPF8KPEGPV6KPEGPV6EJGPIWK\HQNNQYKPIVJG5GTKQWU(EJGPIWK\HQNNQYKPIVJG5GTKQWU(TCWF1HƂEGoUFCTCWF1HƂEGoUFCYPYPTCKFQHVJGKTEQTRQTCVGTCKFQHVJGKTEQTRQTCVGIncreasedIncreased84% No 61% 3. 35% 4. 84%84% 65% 4. 3. 3. RTGOKUGUsCPFVJKUJCUTGUWNVGFKPEJCPIGUKPVJGYCRTGOKUGUsCPFVJKUJCUTGUWNVGFKPEJCPIGUKPVJGYCNo [VJCVUGC[VJCVUGCDecemberTEJYCTTCPVUCTGQDVTEJYCTTCPVUCTGQDV 2013/January 2014 Legal CKPGFBusinessCKPGF 49 &#+�&)1.+#8+�&)1.+#6*6* 87% Yes No Yes No 42% CPFGZCPFGZGEWVGFGEWVGF 58% Ye42sYe%s No58% No 42%42% 58%58% Claims arising from defective legal documentation Spending on litigation increased in last 5 years? If yes, more litigation? Would you consider entering lit funding/ATE in future?

Yes 27%

No 73%

Regulatory enforcement action handled in-house? Claims consequent on regulatory investigations Budgeting for increase? 1. Would consider it for every litigious matter - 13%; 2. Would consider for each litigious matter where acting as claimant - 4% 3. Would only consider in extreme/rare circumstances - No Yes 29%; 4. Never -54% 51% 49%

Increase 24% Decreased 1. No 16% Same 2. Decrease 39% 61% Yes 16% Increased 61% 84% 4. 3.

Yes No 42% 58% INSIGHT: BANKING LITIGATION

u Our survey showed a mixed picture RECENT KEY BANKING CASES FROM THE CRISIS when respondents were asked about the Deutsche Bank v Sebastian Holdings a claim against Barclays in April 2012 over current level of claims compared with the This case was one of the largest ever its purchase of certain swap and collar five-year period of 2008 to 2012. A little less to be heard in London’s High Court, derivative products, which were used than a third (31%) said that they were now brought by Deutsche Bank over $240m to refinance two loans that the bank seeing more litigation, while 35% said they in losses incurred at the height of the had issued. were seeing less and 34% responded that it financial crisis by Sebastian Holdings, After news of the Libor scandal broke had remained the same. The varied picture the investment fund run by Norwegian in the summer of 2012, Graiseley added an from these responses reflects the wide range of businessman Alexander Vik. Sebastian allegation to its claim that Barclays had cases that different types of banks are facing. then launched a counter-claim against misrepresented the Libor rates. Among a ‘The mixed results for this question the bank for $8bn in damages. group of banks accused of manipulating perhaps reveal the experiences of different The case centred on a series of Libor, a key benchmark determined by the institutions,’ comments Edward Davis, a complex currency trades that unravelled rate at which banks are prepared to lend to dramatically after the collapse of Lehman one another, Barclays was fined $450m by Brothers in 2008, forcing Deutsche to US and UK regulators. make large margin calls to cover In the Unitech case, Deutsche Bank Sebastian’s positions. Those calls, Vik sued the Indian property company over claimed, caused him to close down a the repayment of a loan and a further number of profitable positions, hence his $11m owed for a related interest rate claim against the bank. swap. Unitech then counter-sued, claiming After a four-month trial in the High that both the loan and swap were linked $63bn Court, Mr Justice Cooke found in favour to Libor rates. As in the Graiseley case, in financial crisis- of Deutsche, ordering Sebastian to pay Unitech sought to amend its claim to add $240m. At the time of going to press costs allegations of Libor manipulation, a move had not been awarded although, with the that was rejected in February 2013 by Mr related settlements two sides fielding four and five counsel and Justice Cooke. However, in light of the the case stretching over several months, it Graiseley ruling, the Libor decisions in both made by the six could be one of the costliest claims to arise cases went to the Court of Appeal where from the crisis. Lord Justice Longmore ruled that both largest US banks For Deutsche Bank: Freshfields Bruckhaus claims could proceed. Deringer; David Foxton QC of Essex Court The Graiseley case is scheduled for April Chambers; and Sonia Tolaney QC of 3 2014 and looks set to become a key test Verulam Buildings case for Libor-related claims. litigation partner at Stephenson Harwood. For Sebastian Holdings: Travers Smith; and For Graiseley: Cooke, Young & Keidan; and ‘Generally you would have thought that David Railton QC of Fountain Court Stephen Auld QC of One Essex Court many banks are seeing less litigation now For Barclays: Clifford Chance; Robin as the economy and the markets improve, Graiseley Properties v Barclays Bank; Dicker QC and Jeremy Goldring QC of but on the other hand, certain institutions Deutsche Bank v Unitech South Square will no doubt be seeing more. For example, Although these were brought as two For Deutsche Bank on the lenders’ the UK clearers who are facing payment separate cases, they took on combined action: Allen & Overy; and Richard protection insurance (PPI) and interest rate significance when a Court of Appeal judge Handyside QC of Fountain Court swap mis-selling claims or the larger banks ruled in October that parties could attach For Deutsche Bank on the swaps facing claims arising from international accusations of Libor rigging to their cases action: Freshfields Bruckhaus Deringer; regulatory investigations.’ against the banks. Mark Hapgood QC of Brick Court; and As Gentin points out, there were cases that Both were originally brought as Timothy Howe QC of Fountain Court arose immediately following the economic claims concerning the mis-selling of For Unitech: Stephenson Harwood; and crisis concerning issues like the collapse of interest rate swaps which turned sour John Brisby QC of 4 Stone Buildings Lehman and then, after that, there was a in the financial crisis. Graiseley sense that the financial community was over Properties, part of the Guardian Homes the worst of the claims. What has happened Group nursing homes business, launched (Continued on page 52) since is that, as the economic climate has remained depressed, those that were

9GCTGCFXKUKPI'I[RV9GCTGCFXKUKPI'I[RVoUIQXGTPOGPVQPVJGVTCEKPICPFTGEQXGoUIQXGTPOGPVQPVJGVTCEKPICPFTGEQXGT[T[HTQOCETQUUVJGIHTQOCETQUUVJGINQDGQHNQDGQH 50 Legal Business December 2013/January 2014 *+&'#0&5''-*+&'#0&5''- CUUGVUOKUCRRTQRTKCVGFD[HQTOGTRTGUKFGPV*QUPK/WDCTCMCUUGVUOKUCRRTQRTKCVGFD[HQTOGTRTGUKFGPV*QUPK/WDCTCMJKUHJKUHCOKN[CPFJKUCUUQEKCVGUCOKN[CPFJKUCUUQEKCVGU Same More 34% 31%

Less 35% No di erence Yes 16% No No 8% 47% 53% Yes 76% Decreased Increased 37% 63%

Claims for mis-selling Are you now seeing more or less litigation than in the period 2008-12? More litigation in-house? If yes, how often?

Rarely Often 24% No Yes 33% 54% 46% Same More 34% 31% Occasionally Same More 43% 34% 31% Less Claims by hedge funds Spending on litigation increased in last year? Financial regulatory climate more combative? Considering using arbitration more often? 35% Less No 35% di erence Yes No Yes 16% 13% No Nodi erenc 8% e 47% 53% Yes 16% No No 8% Yes 47% Yes Increased 53% 76% No Decreased Yes 35% No 63% 65% 37% 76% 87% Decreased Increased 37% 63LEGAL% BUSINESS AND STEPHENSON HARWOOD

Claims arising from defective legal documentation Spending on litigation increased in last 5 years? If yes, more litigation? Claims for mis-selling Are you now seeing more or less litigation than in the period 2008-12? More litigation in-house? If yes, how often? Would you consider entering lit funding/ATE in future?

Claims for mis-selling Are you now seeing more or less litigation than in the period 2008-12? More litigation in-house? If yes, how often? Yes 27% Rarely Often 24% Yes No No 33% Rarely 46% 54% 73% Often 24% No Yes 33% 46% 54% Same More Occasionally 34% 31% 43% HAS YOUR INSTITUTION’S SPENDING ON ARE YOU BUDGETING FOR AN INCREASE Occasionally LITIGATION INCREASED OR DECREASED IN OR DECREASE IN SPENDING ON Regulatory enforcement action handled in-house? 43% Claims by hedge funds SpendingTHE LASTClaims on YEAR?litigation consequent increased onLess regulato in last ryyear? investigationsFinancial regulatoLITIGATIONryBudgeting climate FOR more forTHE increasecombativ NEXT? e?12 MONTHS?Considering using arbitration more often? 35% 1. Would consider it for every No Claims by hedge funds Spending on litigation increased in last year? Financial regulatory climate more combative? Considering using arbitration more often? litigious matter - 13%; 2. Would Yes di erence consider for each litigious matter 16% 13% Yes Increase where acting as claimant - 4% Yes No No 8% 3. Would only consider in 47% 24% 13% Decreased 53% extreme/rare circumstances - No Yes Yes Yes 49% 37% Same No29%; 4. Never -54% 51% IncreasedIncreased Decrease 76% 35% No Decreased 61% 65% Yes 63% 63% 16% No 87% 37% 35% No 65% 87%

Claims arising from defective legal documentation HASSpending YOUR on litigationINSTITUTION’S increased SPENDING in last 5 years ON? ISIf MORE yes, more LITIGATION litigation? BEING HANDLED Claims for mis-selling Are youLITIGATION now seeing INCREASEDmore or less litigation OR DECREASED than in the period 2008-IN-HOUSE12? More THAN litigation FIVE in-house YEARS? AGO? Would you considerIf yes, entering how ofte litn? funding/ATE in future? Claims arising from defective legal documentation Spending on litigation increased in last 5 years? If yes, more litigation? Increase OVER THE LAST FIVE YEARS? Would you consider entering lit funding/ATE in future? Yes 24% ‘There was a lot of talk Decreased 1. 27% No Yes 16% Same 2. Decreased Decrease 39% about27% bank-on-bank 61% Yes Rarely 16% 16% Often 24% No Yes Increased Yes 61% No No 33% 4. 73% litigation54% 46% but these 84% 47% 3. No 53% 73% Increased results suggest that Yes Occasionally 84% No 42% 43% banks have always 58% Regulatory enforcement action handled in-house? Claims consequent on regulatory investigations Budgeting for increase? Claims by hedge funds Spending on litigation increased in last year? Financial regulatory climate more combative? Considering using1. Would arbitration consider it more for ever oftey n? tried to avoid those Regulatory enforcement action handled in-house? Claims consequent on regulatory investigations Budgeting for increase? litigious matter - 13%; 2. Would 1. Wconsiderould consider for each it forlitigious every matt er mis-selling (46%) and cases stemming from over 60% of respondents said that they always type of casesYes and that litigiouswhere matt actinger -as 13%; claimant 2. Would - 4% regulatory investigations (49%). tried to avoid litigation with other banks and 13% consider3. Would for onlyeach consider litigious inmatt er hasn’t changed since As has been seen in the regulatory made greater efforts to settle these types of Yes wherextre emeacting/rar ase claimantcircumstances - 4% - No investigations into Libor and the controversy disputes. Apart from a couple of headline 49% 3. W29%;ould 4. only Never consider -54% in Yes 51% Edward Davis, over PPI and interest rate swaps, there has disputes in the last five years, such as HSH extreme/rare circumstances - No No the Yecrisis.’s 35% No been a steady stream of suits arising from Nordbank v UBS and RZB v RBS, there have 29%; 4. Never -54% 65% 51% 49% Stephenson87% Harwood both areas (see box, ‘Recent key banking been notably few cases. ‘There was a lot of cases from the crisis’, opposite). Claims talk about bank-on-bank litigation and a waiting to see if asset values would rise are arising from defective legal documentation number of high-profile disputes but these now bringing Claimsclaims arising before from the defective statute legal of documentationwere singledSpending out by on 27%, litigation some increased way behind in last 5 yearsresults? suggestIf yes, that more banks litigation have? always tried limitations runs out. ‘The number of cases the two most common sources of claims, but to avoid those type of cases and that hasn’t Would you consider entering lit funding/ATE in future? grew after the financial crisis but of more it is a figure which StephensonIncrease Harwood’s changed since the crisis,’ says Davis. 24% relevance Yeiss that these are not insignificantDecreased Davis points out as slightly surprising. One respondent to the survey sums up 1. Increase No cases,’ Gentin27% says. ‘The intensity of litigation16% ‘There was a lineSame of thought24% at the start the prevailing attitude: ‘We are not afraid to 2. Decreased Decrease 39% 1. and regulatory activity that banks are of the crisis that there61% might be more claims litigate againstNo other banks wheneverYes needed 16% 16% 2. currently facing is historic in nature.’ Increasedagainst law firmsSame as transactions and their but it all depends on the issues61% involved and No Decrease 39% In terms of where claims are stemming 84%documents come61 under% scrutiny,’ he says. the circumstances and the Yecosts implications. 4. 73% 16% 3. from, our survey asked respondents if theyIncreased ‘While there may not be more claims against We always try to find an 61amicable% way of 4. were seeing more from mis-selling; more 84% law firms as such, there is plainly a feeling dealing with the situation first but it does not 3. Yes claims being brought by hedge funds; more among many banks that poor documentation mean that we avoid litigation.’ No 42% from defective legal documentation; and is responsible for more disputes.’ When58% respondentsYe weres asked where they more claims consequent on regulatory Where there hasn’t been an increase in expectRegulatoNo morery enforcement litigation42 action to% come handled from in-house over the? Claims consequent on regulatory investigations Budgeting for increase? 58% investigations. Most had seen more claims for activity is in bank-on-bank litigation. Just next three to five years, the spectre of u 1. Would consider it for every litigious matter - 13%; 2. Would consider for each litigious matter where acting as claimant - 4% 3. Would only consider in extreme/rare circumstances - No Yes 29%; 4. Never -54% 9GCTGCFXKUKPI'I[RV9GCTGCFXKUKPI'I[RV51% 49% oUIQXGTPOGPVQPVJGVTCEKPICPFTGEQXGoUIQXGTPOGPVQPVJGVTCEKPICPFTGEQXGT[T[HTQOCETQUUVJGIHTQOCETQUUVJGINQDGQHNQDGQH *+&'#0&5''-*+&'#0&5''- CUUGVUOKUCRRTQRTKCVGFD[HQTOGTRTGUKFGPV*QUPK/WDCTCMCUUGVUOKUCRRTQRTKCVGFD[HQTOGTRTGUKFGPV*QUPK/WDCTCMJKUHJKUHDecemberCOKN[CPFJKUCUUQEKCVGUCOKN[CPFJKUCUUQEKCVGU 2013/January 2014 Legal Business 51

Increase 24% Decreased 1. No 16% Same 2. Decrease 39% 61% Yes 16% Increased 61% 84% 4. 3.

Yes No 42% 58% INSIGHT: BANKING LITIGATION

RECENT KEY BANKING CASES (CONTINUED) Harbinger Capital Partners v Andrew Caldwell Proceedings began in May 2011 before (the independent valuer of Northern Rock) reaching the Court of Appeal in October 2013 In the UK, the problems at Northern Rock were with the claims for negligent mis-statement and the first sign of a crisis in Britain’s banking breach of duty to give suitable advice dismissed. system. When the bank was nationalised in Crucially Green and Rowley had no notes or other early 2008, Northern Rock shareholders lost documents detailing a 2005 meeting with the significant sums. The hedge fund Harbinger bank to put the swap in place, while RBS had its Capital challenged the decision of the bank’s own account of the meeting. independent valuer, Andrew Caldwell, not to In the original judgment, Judge Waksman award compensation to the bank’s shareholders, QC emphasised that it was a highly fact- after he assessed the value of their shares. sensitive case and therefore it has been viewed In May 2013 the Court of Appeal ruled that as precedent setting for the slew of other Caldwell was right in his decision, rejecting the interest rate swap mis-selling claims to arise claimant’s assertion that its shareholding could since the crisis. be worth as much as £400m. Harbinger lost a For Green and Rowley: Clarke Willmott; David first case in 2011 but opted to appeal the ruling Berkley QC of St Johns Buildings ‘The intensity that its shares were worthless. For RBS: Dentons; Andrew Mitchell QC of It was not the first case to question the Fountain Court of litigation and nationalisation of Northern Rock. In 2009 the hedge funds SRM Global and RAB Special Zaki v Credit Suisse regulatory activity Situations brought a claim against the This 2011 case was one of many to arise over the Government but had their case thrown out. alleged mis-selling of complex financial products that banks are For Harbinger: Brown Rudnick; Mark Phillips QC before the financial crisis, which quickly turned of South Square; and Monica Carss-Frisk QC of sour after the collapse of Lehman. The claim was currently facing is Blackstone Chambers brought by the widow of Mohamed Magdy Zeid, For Andrew Caldwell: Mayer Brown; and Mark an Egyptian businessman who, between 2003 and historic in nature.’ Howard QC of Brick Court September 2008, bought 39 structured products from Credit Suisse’s UK operations. The claim Pierre Gentin, John Green and Paul Rowley v RBS focused specifically on ten notes, all of which This was one of the first cases brought over were leveraged, that Zeid purchased between Credit Suisse the alleged mis-selling of interest rate swaps. early 2007 and June 2008. In October 2008 Property developers Green and Rowley funded Credit Suisse issued a margin call and when Zeid u greater regulatory oversight once again their real estate business, in part, with financing did not transfer the required additional collateral, loomed large. On a scale of one to five, with from The Royal Bank of Scotland (RBS). In the bank liquidated the notes causing Zeid to five being strong agreement, respondents 2005 they entered into a £1.5m base rate swap suffer a loss of almost $70m. scored whether they anticipated more agreement where if the base rate exceeded After Zeid died in 2010, the claim against litigation from four specific areas. Claims 4.83%, the bank paid the pair the difference Credit Suisse was brought by his widow, Soheir consequent on regulatory investigations between the base rate (4.75% at the time of the Ahmed Zaki. It boiled down to whether Credit received the highest average score at just over swap) and 4.83%, but if it fell below 4.83% they Suisse had made a personal recommendation to 3.5. None of the other three areas – claims would have to make payments to the bank. The buy the notes and, if that were the case, whether arising from formal insolvencies of zombie deal proved beneficial as rates remained high but the bank had taken reasonable steps to ensure companies, limitations expiring from 2007/08 was hit by the economic crisis and the collapse of that its advice was suitable for Zeid. After the first credit crunch issues and refinanced loans interest rates in 2008. When Green and Rowley case ruled in favour of the bank the claim made coming to maturity – scored above 2.8. enquired about ending the swap early in 2009, its way to the Court of Appeal, which upheld the The unprecedented levels of regulatory they were told it could cost almost £140,000. earlier decision. scrutiny and sanction imposed on the banks In their claim, the businessmen alleged that For Zaki: Howard Kennedy; Robert Anderson QC (see box, ‘Growing some teeth’, page 48) RBS had given negligent advice and that if it of Blackstone has been manifest by the number of high- hadn’t been for the bank’s breach of duty they For Credit Suisse: Freshfields Bruckhaus Deringer; profile hires from the regulatory arena would never have entered into the swap. Adrian Beltrami QC of 3 Verulam Buildings made by some of the biggest banking institutions. For example, Lloyds Banking

9GYGTGVJGƂT9GYGTGVJGƂTUVƂTOVQUGTUVƂTOVQUGTXGCP'PIXGCP'PINKUJ*KIJ%QWTNKUJ*KIJ%QWTVENCKOXKC(VENCKOXKC(CEGDQQMCEGDQQM 52 Legal Business December 2013/January 2014 +0018+0018##6'#0&&'.+8'46'#0&&'.+8'4 LEGAL BUSINESS AND STEPHENSON HARWOOD

Group made a significant splash when it former special assistant and associate counsel ON THE OUTSIDE hired the former general counsel (GC) of the at the White House. Increased regulatory oversight may be part of Financial Services Authority (FSA), Andrew Speaking to Legal Business recently, the new dynamic for banks, but they do not Whittaker, as its current GC in June 2012. Whittaker emphasised how crucial a appear to be seeing a change in the volume Other high-profile hires include Stuart Levey, constructive relationship with the regulators of claims from overseas jurisdictions. Just a former DoJ associate deputy attorney is to the banks, saying that although the under three-quarters (72%) of respondents to general who joined HSBC as chief legal officer regulatory landscape is tougher, the response our survey said there were no specific foreign in January 2012 in the wake of wholesale shouldn’t be to push back – banks and jurisdictions where they were seeing more investigations in the US and UK over the regulators should have shared objectives so litigation. Of those that did report an increase, bank’s money-laundering compliance that when there’s a new regulatory initiative, the US was most regularly cited (67%), procedures. These investigations saw the the banks will work with the regulators. followed by Europe (44%) and then Asia (22%). bank fined $1.9bn – then the largest ever bank Meanwhile, former head of enforcement To Stephenson Harwood litigation partner payout to date – over its inadequate anti- at the FSA and now GC at PwC Margaret Sue Millar, the number who highlighted Asia money laundering system a year ago. Barclays Cole points out that regulators collectively was significant. ‘Now that the world economy also replaced outgoing GC Mark Harding are making a point of sending a message is increasingly moving east, you have to ask this summer with Bob Hoyt, GC and chief to financial institutions through their whether that’s where more and more claims regulatory affairs officer at PNC Financial enforcement activity – therefore it is essential are now going to come from.’ Services and the GC at the US Department of that in-house teams have individuals that are Clients also point to the rise of claims and the Treasury from 2006 to 2009, as well as a adept at understanding financial watchdogs. the tougher regulatory climate overseas. u

9GYGTGVJGƂT9GYGTGVJGƂTUVƂTOVQUGTUVƂTOVQUGTXGCP'PIXGCP'PINKUJ*KIJ%QWTNKUJ*KIJ%QWTVENCKOXKC(VENCKOXKC(CEGDQQMCEGDQQM +0018+0018##6'#0&&'.+8'46'#0&&'.+8'4 December 2013/January 2014 Legal Business 53 Same More More Same34% 31% 34% 31% Same More 34% Less 31% Less35% 35% No di erencNo e Less di erenc16% e 35% Yes No Yes No 8%No16 % No 47% No 8% 53% 47% di erence 53% Yes Yes 16% Yes No 8% 76% Decreased Increased No Increased 47% 76% Decreased37% 63% 53% 37% 63% Yes 76% Decreased Increased INSIGHT: BANKING LITIGATION 37% 63%

Claims for mis-selling Are you now seeing more or less litigation than in the period 2008-12? More litigation in-house? If yes, how often? Claims for mis-selling Are you now seeing more or less litigation than in the period 2008-12? More litigation in-house? If yes, how often?

Claims for mis-selling Are you now seeing more or less litigation than in the period 2008-12? More litigation in-house? If yes, how often? Rarely Often Rarely24% No Yes Often 24% Yes 33% 54%No 46% 33% 54% 46% Rarely Often 24% No Yes 33% Occasionally 46% Occasionally 54% overall has43 been% on the increase. When 43% HAS THE FINANCIAL REGULATORY asked whether their institution’s spending Occasionally Claims by hedge funds Spending on litigation increased in last year? on litigation had increased since 2008, 84% FinancialCLIMATE regulato BECOMEry climate MORE more COMBATIVE combativ INe? Considering using arbitration more often? 43% Claims by hedge funds Spending on litigation increased in last year? FinancialTHE LAST regulato THREEry climateYEARS? more combative? Considering using arbitration more often? said it had gone up. In addition, just under two-thirds (63%) responded that spend had Yes Claims by hedge funds Spending on litigation increased in last year? Financial regulatory climate more combative? Considering using arbitration more often? increased in the last year. 13%Yes No difference 13% Although there has been much focus across 16% the market on driving a better deal with Yes No 8% external advisers, the responseYes to our survey 13% No Yes indicatedNo that litigation35% remains less price No Yes 65% 35% No 76% sensitive65% than many other practice areas. The 87% Yes 87% litigationNo reputation of a law firm and a firm’s 35% No or individual65% lawyer’s technical knowledge 87% of a product or sector were pinpointed as by Claims arising from defective legal documentation Spending on litigation increased in last 5 years? IF YES, AREIf yes, YOU more SEEING litigation MORE? far the most important areas to consider when Claims arising from defective legal documentation Spending on litigation increased in last 5 years? If yes, more litigation? Would you consider entering lit funding/ATE in future? LITIGATION AS A RESULT? Would you consider entering lit funding/ATE in future? appointing an external adviser. On a scale of one to five, low hourly rates Claims arising from defective legal documentation Spending on litigation increased in last 5 years? Yes If yes, more litigation? ‘Arbitration is cheaper emerged as the least important criteria, 27%Yes Would you consider entering lit funding/ATE in future? 27% scoring an average of 2.94 compared with a No firm’s reputation at 4.33 and a firm or lawyer’s Yes in some cases than 39% No 27% technical knowledge at 4.65. ‘It’s interesting to 73%No Yes doing two appeals see that historic relationships are important 73% 61% No More in a national court 73% Same 34% 31% system. If arbitration Regulatory enforcement action handled in-house? Claims consequent on regulatory investigations Budgeting for increase? RegulatoIS REGULATORYry enforcement ENFORCEMENT action handled ACTIONin-house? Claims consequent on regulatory investigations Budgeting for increase? 1. Would consider it for every Less AGAINST YOUR BUSINESS EVER is sold1. W ouldas consider being it for every 35% litigious matter - 13%; 2. Would No RegulatoHANDLEDry enforcement WHOLLY action IN-HOUSE, handled RATHER in-house? litigiousconsider matt for eacher - 13%; litigious 2. W mattoulder Claims consequent on regulatory investigations Budgeting for increase? cheaper than a first di erence THAN EXTERNALLY? 1.considerwher Woulde acting consider for each as claimantit litigious for ever - matt y4% er where acting as claimant - 4% Yes 16% litigious3. Would matt onlyer consider- 13%; 2. inW ould No No 8% instance3. Would only decision, consider in 84% considerextreme for/rar eache cir cumstanceslitigious matt - er No Yes 47% Yes 53% wherextr29%;eeme acting4. /rNeverar eas cir claimant-54%cumstances - 4% - reported increase in 51%No 49% Yes 49% then3. 29%;that’s Would 4. onlyNever consider -54% wrong.’ in 51% 76% Yes Increased No extreme/rare circumstances - No Yes Decreased litigation spending 63% 42% Shai Wade,29%; 4. Never -54% 51% 49% 37% 58% Stephenson Harwood since 2008

If yes, how often? Claims for mis-selling Are you now seeing more or less litigation than in the period 2008-12? More litigation in-houseIncrease? IF YES, HOW OFTEN? u ‘Historically other parts of the world like Increase24% Decreased EMEA and Asia have been significant1. in and that hourly rates and the overall costs 24% No 1. Decreased16% our global litigation docket but less2. so than proposal are not seen to be as important,’ 16% Same Increase 39%No Same Decrease Yes the US,’ comments Gentin. ‘In recent2. years, Davis comments. 61% 24Decrease% Often 39%Rarely Decreased 61% 16% 61Ye%s there’s been an increaseRarely in litigation1. and Of course, financial institutions are Increased 16% 24% 33% No 61% Often4. 24% Yes 16% Increased84% Same regulation in Europe and Asia with2. 3. more not oblivious to the cost of a case – a law No Decrease 39% 33%4. 46% 84% 61% Yes scrutiny of the industry.’ 3. firm’s overall costs proposal, including any 54% 16% Increased 61% As the volume of litigation that the survey alternative costs arrangement, was considered OccasionallyYe s 84% respondents have4. seen has increased3. over important, scoring 3.75 on average – and as No 43% 42Ye%s Occasionally 58%No 42% the last five years and43 %the breadth and depth early pioneers of panels, banks have been 58% of regulatory action has increased markedly, leaders in extracting greater value from the Yes No it’s not surprising that litigation spending law firm/client relationship. But as the balance Claims by hedge funds Spending on litigation increased in last year? 42% Financial regulatory climate more combative? Considering using58% arbitration more often?

Yes 13%

Yes 9GCEVGFQPUQOGQHVJG7-oUNCTIGUVCPFOQUVEJCNNGPIKPIƂPCPE9GCEVGFQPUQOGQHVJG7-oUNCTIGUVCPFOQUVEJCNNGPIKPIƂPCPEKCNCPFEQOOGTEKCNECUGUKCNCPFEQOOGTEKCNECUGU No 35% No 54 Legal Business December 2013/January 2014 65% $+)#0&6$+)#0&617)*17)* VJCVECOGVQVJGEQWTVJCVECOGVQVJGEQWTVUNCUV[GCTVUNCUV[GCT 87%

Claims arising from defective legal documentation Spending on litigation increased in last 5 years? If yes, more litigation? Would you consider entering lit funding/ATE in future?

Yes 27%

No 73%

Increase 24% Decreased 1. No 16% Same 2. Decrease 39% 61% Yes 16% Increased 61% 84% 4. 3.

Yes No 42% 58% LEGAL BUSINESS AND STEPHENSON HARWOOD

including give-backs, caps, tiers of discounts ARE YOU ANTICIPATING MORE LITIGATION OVER THE NEXT THREE TO FIVE YEARS and tranches of free work. The point is that AS A RESULTAnticipating OF ANY more OF THE litigation? FOLLOWING? (1= LEAST LIKELY; 5=MOST LIKELY) 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 in5 the US than we had in 2012.’ As well as banks like Credit Suisse taking 80% steps to change4 how they use outside counsel, law firms have been eager to offer a wide 60% variety of 3arrangements to satisfy banking clients. According to our survey, reduced hourly rates2 remains firms’ favoured approach, 40% with 80% of respondents saying they had been offered a lower1 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 'zombie' companies crunch issues (50%). ‘There’s been a lot of talk about the death of hourly rates but there seems to be a reluctance to grapple with other ways of 1 2 3 4 5 funding litigation and capping costs exposure,’ says Millar of the results. ‘My experience is that we’ve tended to offer conditional fee of power in that relationship has continued to the majority of its contentious cases – so arrangements (CFAs) and with certain banks shift in the last five years the focus has been that the bulk of Mostthe bank’s impor casestant are considerations handled that works, there’s not really a downside to it.’ about more than just a firm’s fees. by a smaller group of firms, a move which ‘We have seen little take-up of alternative ‘We’re now more demanding – all clients are he says will100% mean that the bank’s litigation arrangements by banking clients – even – and firms recognise that,’ Luker points out. spend is less this year than it was in 2012. when we have been proactive in offering 5 ‘We’ve grown with our panel firms and the best Although he declines to name which firms these in relation to disputes on which we 80% relationships are those where the line between make up that smaller group, the bank has are instructed,’ adds Davis. ‘There is clearly 4 internal and external lawyers breaks down.’ in recent years instructed the likes of Davis demand generally for law firms to come For Gentin, the more hostile litigation and Polk & Wardwell,60% Cravath, Swaine & Moore, up with alternative and more sophisticated 3 regulatory climate has not meant that he has Milbank, Tweed, Hadley & McCloy and proposals for dealing with litigation, other had to expand his in-house litigation team Cooley on litigation matters. than just a reduction in the hourly rate, and 2 (he heads a group of around 45 litigators ‘In 2013, 40%we negotiated highly structured that is perhaps not yet something that the spread across the bank’s New York, London, deals – with a small group of carefully- banks have been insisting on.’ 1 Zurich and Hong Kong offices). Instead, he selected counsel – that were designed to cover emphasises getting the balance right between most of our 20%current and anticipated expense in FINDING AN ALTERNATIVE two important factors. 2013,’ Gentin reveals. ‘The structures include Banks obviously don’t lack options when ‘We have to be very much focused on features that are more complex than is typical looking to lower their litigation bills 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 The unprecedentedany altlevelsernative ofof regulatory firm knowledge of scrutiny relationship andthe 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 sanction imposed on the banks has been manifestindvidual lawyer by internally and externally.’ 1 2 3 4 5 Last year Gentin led an extensive review the number of high-profile hires from the regulatory of Credit Suisse’s external litigation advisers in the US – the jurisdiction where it still sees arena made by some of the biggest banking institutions.

9GCEVGFQPUQOGQHVJG7-oUNCTIGUVCPFOQUVEJCNNGPIKPIƂPCPE9GCEVGFQPUQOGQHVJG7-oUNCTIGUVCPFOQUVEJCNNGPIKPIƂPCPEKCNCPFEQOOGTEKCNECUGUKCNCPFEQOOGTEKCNECUGU $+)#0&6$+)#0&617)*17)* VJCVECOGVQVJGEQWTVJCVECOGVQVJGEQWTVUNCUV[GCTVUNCUV[GCT December 2013/January 2014 Legal Business 55 Same More 34% 31% Same More 34% 31% Less 35% Less No 35% di erence No Yes 16% No di erenceNo 8% 47% 53%Yes 16% No No 8% 47% Yes 53% 76% Decreased Increased Yes 37% 63% 76% Decreased Increased INSIGHT: BANKING37% LITIGATION63%

Rarely Often 24% No Yes 33Rarely% 54% 46% Often 24% No Yes 33% 54% 46% Occasionally 43% u but the results from our survey would funding is typically used on the claimant Occasionally suggest that they are not embracing some side and banks often find themselves as the ARE YOU CONSIDERING USING 43% Claims by hedgeof fundsthe newer, more innovativeSpending on funding litigation increased indefendant last year? inFinancial a case, theregulato uptakery climate might more be combative? ARBITRATIONConsidering using MORE arbitration OFTEN more THAN often? FIVE techniques. Third-party-litigation funding, expected to be low. Claims by hedge funds Spending on litigation increased in last year? YEARS AGO? a financing mechanism that has only begun FinancialOn the regulato flip side,ry climate banks more are combativfinding e? Considering using arbitration more often? Yes to get significant traction in the last five themselves increasingly dragged into more 13% Yes years, remains largely unpopular with major appearances in court because of litigation 13% financial institutions. funding as would-be claimants can rely on Yes 35% Yes Just 13% of those who responded to the deeper pockets of hedge funds and other No No 35% our survey said that they had entered into alternative investors to take the banks all the 65%Yes No 65% No a third-party litigation funding and/or an way in a dispute (see ‘How to win cases and 35% 87% 65% No after-the-event (ATE) arrangement in the influence people’, page 58). A recent example 87% last five years. Asked if they would consider is Harbour Litigation Funding bankrolling such an arrangement in the future, 54% a claim against Barclays, alleging the bank Claims arising from defective legal documentation Spending on litigation increased in last 5 years? If yes, more litigation? WOULDWo uldYOU you CONSIDER consider entering ENTERING lit funding INTO/A TE in future? Claims arising from defective legal documentation Spending on litigation increased in last 5 years? If yes, more litigation? Would Ayou LITIGATION consider entering FUNDING/ATE lit funding/A INSURANCETE in future? Yes Banks obviously don’t lack options when looking to AGREEMENT IN THE FUTURE? 27% Yes lower their litigation bills but the results from our 27% 1. No survey would suggest that they are not embracing some 2. 73% No of the newer, more innovative funding techniques. 73% 4. 3.

replied never, with 29% saying they misused confidential information in its 2010 Regulatory enforcement action handled in-house? Claims consequent on regulatowouldry only investigations consider it in extremeBudgeting or for increasetakeover? of Tricorona. The £164m claim has rare circumstances. beenRegulato broughtry enforcement by UK trading action handled and investments in-house? 1. Would consider it for every Claims consequent on regulatory investigations Budgeting for increase? litigious matter - 13%; 2. Would Firms are clearly aware that banks are firm CF Partners, which alleges that Barclays 1. Would consider1. Would it consider for every it litigiousfor ever ymatter - 13%; consider for each litigious matter reluctant to consider third-party funding used confidential information it supplied to 2. Would considerlitigious formatt eacher - litigious13%; 2. W matterould where where acting as claimant - 4% or ATE – in our survey only 15% had been the bank when requesting funding for its acting as claimantconsider - for 4%; each 3. Would litigious only matt considerer in 3. Would only consider in extreme/rarewher circumstancese acting as claimant - 29%; -4. 4% Never -54% offered third-party funding, while 11% had own bid for Tricorona. extreme/rare circumstances - No Yes 3. Would only consider in been offered ATE. Given that third-party But third-party funding also poses wider 29%; 4. Never -54% 51% 49% extreme/rare circumstances - No Yes challenges to banks. ‘It’s not something we would 29%; 4. Never -54% 51% 49% ordinarily use,’ says RBS’s Luker. ‘We want to more often than five years ago. The same retain full control over any litigation that we’re percentage responded that their institution involved in. There are collateral reputational tends to avoid arbitration, with price/value issues that are very important to us.’ (56%) and perceived lack of speed (44%) the The question is whether this attitude leading reasons for avoiding it. will soften as third-party funding and ATE ‘Arbitration is cheaper in some cases than Increasebecome more widespread. ‘Banks’ attitude to doing two appeals in a national court system,’ 24% Decreased Increase third-party funding potentially could change, comments Stephenson Harwood arbitration1. 24% No 16% Same24% I don’t see why it wouldn’t,’ suggests Millar. partner Shai Wade. ‘If arbitration is sold as 2. Decreasedof banks are Decrease 39% 1. 61% ‘It’s surprising that thingsNo like buying ATE to Yesbeing cheaper than a first instance decision, 16% Same 16% 2. Increased Decrease cap exposure hasn’t attracted39% more interest as 61%then that’s wrong.’ 61% Yes budgeting84% for an 16% a cost management tool.’ ‘The results suggest that4. there are still 3. Increased 61% While financial institutions have been concerns about things like quality of arbitrators 84% 4. 3. increase in litigation slow to catch on to new methods for funding and price and there are perhaps other issues Yes litigation, our survey reveals that they also like non-enforceability in many jurisdictions of No 42% remain less than convinced58% onYe thes merits of hybrid or one-way clauses, which banks have spending next year No arbitration. A little over a third42 (35%)% said used quite widely,’ comments Davis on banks’ 58% that they were considering using arbitration reluctance to arbitrate.

9GYGTGRTQWFYKPPGTUNCUV[GCTQHVJTGGOCLQTCYCTFUHQTNKVKICVKQPCPFTGIWNCVQT[VGCOQH 56 Legal Business December 2013/January10%'6 2014 9+%'#0&6*4+%' VJG[GCT Anticipating more litigation?

100% 5 80% 4

60% 3 2 LEGAL BUSINESS AND STEPHENSON HARWOOD 40% 1

20%

0% Rising numbers of formal Limitation periods expiring Claims consequent on Reﬁnanced loans insolvencies of from 2007/08 credit regulatory investigations coming to maturity 'zombie' companies crunch issues

1 2 3 4 5

WHAT ARE THE MOST IMPORTANT CONSIDERATIONS IN DECIDING WHICH FIRM(S) TO INSTRUCT ON LITIGATION MATTERS? (1= LEASTMost IMPORTANT; important 5=MOSTconsiderations IMPORTANT)

100% 5 80% 4

60% 3 2 40% 1 20% ‘Banks are probably 0% the most sophisticated Low hourly rates Overall cost Litigation Firm or individual My institution's My own historic proposal (including reputation lawyer's technical historic relationship with litigators and they any alternative of firm knowledge of relationship the firm or cost arrangement) product or sector with the firm or individual lawyer indvidual lawyer look at matters in 1 2 3 4 5 purely commercial terms but that is not

Although the results from our survey a means of satisfactorily settling a dispute necessarily reflected suggest that litigation remains the favoured without the cost and time of going to court.’ form of dispute resolution for banks – or Gentin also underlines the benefits in their approach to perhaps the least worst option – arbitration’s of using mediation. ‘It’s a flexible way for appeal may grow as financial institutions in-house counsel to discuss potential funding litigation.’ grow their business in emerging markets resolution in a neutral format,’ he says. where the local court system may not be ‘We have found mediation a good tool to Sue Millar, the preferred venue to settle disputes. send signals in cases, gain information and In addition, the creation of the Panel of explore settlement.’ Stephenson Harwood Recognised International Market Experts Although the survey points to an increase in Finance (or PRIME Finance), a specialist in litigation and a clear rise in litigation arbitration centre for the settlement of spending, the last five years have not seen signs that greater flexibility will reduce costs complex financial disputes established in banks shift their attitudes on ADR or more and bring more certainty.’ 2012 by Lord Woolf and former Allen & sophisticated forms of billing. The irony is, of ‘Banks are probably the most sophisticated Overy partner Jeffrey Golden, reflects a course, that banks remain arguably the most litigators and they look at matters in purely growing acceptance that traditional litigation sophisticated users of legal services as they commercial terms but that is not necessarily doesn’t always offer the best method of have pioneered the use of panels and led the reflected in their approach to funding settling banking disputes. way on leveraging their buying power with litigation,’ she adds. And even if arbitration isn’t the best external advisers. With banks’ litigation coffers continuing to option, banks are prepared to consider some As Stephenson Harwood’s Millar swell as regulatory investigations and claims form of alternative dispute resolution. ‘We’ve emphasises, banks may have their budgeted mount, the need to view disputes in purely always been supporters of ADR,’ insists legal spend but what they value over commercial terms has never been more Luker. ‘It’s hard to argue against it if there’s everything is certainty and, ‘there may be no pressing. LB

u 9GYGTGRTQWFYKPPGT9GYGTGRTQWFYKPPGTUNCUV[GCTQHVJTGGOCUNCUV[GCTQHVJTGGOCLQTCLQTCYCTFUHQTNKVKIYCTFUHQTNKVKICVKQPCPFTGIWNCVQTCVKQPCPFTGIWNCVQT[VGCOQH[VGCOQH 10%'610%'69+%'#0&6*4+%'9+%'#0&6*4+%' VJG[GCTVJG[GCT 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