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Fallout from recession to put lawyers in the dock

APART form Bernie Madoff, prosecutions in the wake of the financial crisis have been few and far between. Bankers, it seems, are in the clear over their behaviour during the boom. Lawyers, however, might be in the firing line. Last week two lawyers charged with insider trading by the Financial Services Authority (FSA) were committed to stand trial in Southwark Crown Court at the end of October. Andrew Rimmington and Michael McFall, both former partners of major law firms in London, are charged with eight counts of insider dealing relating to the 2006 takeover of Neutec Pharma by Novartis and are contesting the allegations.<br /><br />The FSA has been stung by allegations that it is toothless, and is very keen indeed to show that it is doing something. This has led to increased interest in the work of lawyers who drafted contracts. An increase in lawsuits is a usual feature of the aftermath of a recession, as businesses seek recompense for losses incurred where they believe others were to blame. The usual rise in auditor negligence claims against the large accounting firms has not yet emerged, but instead law firms are in the frame.<br /><br />According to research by law firm Reynolds Porter Chamberlain, the number of negligence claims against solicitors in the High Court grew by 158 per cent last year, from 31 in 2007 to 80 in 2008, and that increase is set to continue.<br /><br />Tim Parkes, a partner at Herbert Smith who acts for banks and professionals in fraud and negligence claims, says: &ldquo;My guess is that, because of the massive increase in the complexity of the financial transactions that have been taking place in the years since 2000, disputes will produce more claims against lawyers.&rdquo;<br /><br />He says that many cases are likely to emerge as a result of flaws in the contracts governing transactions, particularly on the most complex structured finance deals.<br /><br />&ldquo;What is going to be a real feature this time around is that claims will be arising because of defective documentation, principally in the area of banking and financial services. We are seeing a lot of sloppy drafting in transaction documents, where documents have been redrafted and reworked so many times that they no longer work, and the document no longer fits together properly.&rdquo;<br /><br />An increase in claims could prove costly for the whole profession. Law firms are forced to sign up for their compulsory professional indemnity cover by 1 October each year, and this year increases in premiums of as much as 20 per cent have been a feature thanks to the predicted rise in cases against lawyers resulting from the recession.<br /><br />Parkes predicts more claims will arise as the economy begins to pick up. &ldquo;Companies have been doing a lot of sorting out and trying to resolve their positions, and typically what happens is that the professionals get parked at the end of the queue when people look at who to blame,&rdquo; says Parkes. &ldquo;People see what they can do to recover on a loan or whatever, and then once they have got a decent view on what they can get back out of the deal, that&rsquo;s when they look at cases against the professionals involved if there are deficiencies.&rdquo;<br /><br /><strong>TIGHTENED UP</strong><br />Many businesses have been so heavily focused on survival strategies for the last 12 months that disputes have yet to emerge, but that will change.<br /><br />Dingwall says law firms can be seen as having deep pockets, and hence make attractive targets for claims. &ldquo;Law firms, as with accountants and other professionals, are always potential targets when commercial deals go wrong or when agreements don&rsquo;t deliver in the way that parties had expected them to. There can be allegations of inadequate due diligence when dealing with target companies, or arguments that an agreement doesn&rsquo;t do what the client thought it would, or the client wasn&rsquo;t fully advised as to the effect of the agreement.&rdquo;<br /><br />However, she says major law firms have typically tightened up their risk management processes considerably in the last few years to protect themselves from disputes. Arguments over the extent to which lawyers are giving commercial as opposed to legal advice can be easily avoided with properly-drafted engagement letters, she says, which are now commonplace in the City. &ldquo;It&rsquo;s generally the case that law firms have upped their risk management considerably over the last five years or so,&rdquo; she says, &ldquo;with a lot more concentration on best practice.&rdquo;<br /><br />In April, Magic Circle law firm Linklaters avoided a multimillion pound payout after defeating one of the largest negligence claims ever brought against a UK firm. Baltic telecoms group Levicom sued the firm for &pound;44m for allegedly giving unrealistic advice and overstating the company&rsquo;s chances of winning a dispute with a rival. A High Court judge dismissed Levicom&rsquo;s claims for substantial damages, saying the firm did not cause Levicom any loss. With more cases on the horizon, other firms will hope they can provide an equally robust defence.