The Legal jungle doesn’t belong to the predators, it belongs to the adapters. When the going was good and deals were flying in thick and fast, the big players (affectionately known as the BigLaw in the U.S. Legal circles) were pretty much able to rule the roost and selectively pick through the headline making transactions. From box seats at US Open to million dollar bonuses, the BigLaw players were living the American Dream till the financial crisis and the resultant credit crunch served a rude wakeup call. With majority of the law firms fortunes being tied up to the ‘too big to fail’ financial institution, it was only a matter of time till the domino effect of the financial implosion wrecked up its first legal victims. Expansion plans were shelved, billing rates were halved, transactional practice started biting dust, massive layoffs and postponed recruitment news first made headlines and then steadily moved like an obituary column to the inner pages. Faced with the worst economic crisis since the Great Depression, the lawyers did what they have always done in face of adversity, they adapted.

The Early Winners

The Bankruptcy Boom

The nightmare of Corporate America has turned out to be opportunity of a lifetime for Bankruptcy wing of firms like Weil, Gotshal & Manges. The Bankruptcy King, Harvey Miller, is presently billing at $950 per hour. The firm has billed more than $100 million in the Lehman debacle and $55 million (and counting) in the GM restructuring. This is not a temporary flip in an otherwise steady revenue generating practice. Even after a corporation comes out of Chapter 11, the restructuring exercise is likely to go on till the organization returns to its core strengths and regains its nucleus. The Bankruptcy wave has chosen its victims in a phase manner with the financial institutions being the first and obvious victims followed by the big manufacturers; the next wave will be led by retailers and small businesses thus ensuring a continuous revenue generation for the bankruptcy experts.

Securities Litigation- Where there is a meltdown, there would be litigation

Litigation has always been considered as a constant revenue generating and counter cyclical practice groups amongst the law firms. However, the financial crisis saw surprisingly little plaintiff action in its immediate aftermath. However, after the initial lull in derivative suits and securities litigation in the aftermath of the financial crisis (call it the shock and awe effect of the financial crisis), the shareholders struck back with vengeance. Securities cases tracked in Q1 2009 reached 169 filings, up from 125 in Q4 2008 and 134 a year earlier in Q1 2008. On an annualized basis, securities suits filed in Q1 2009 were at 676 cases, representing an increase of 38% from 490 cases filed in 2008. The Madoffs and Stanfords of the corporate arena have added fuel to the wide spread investor wrath and the resultant litigation wildfire is unlikely to be doused soon. The banking crisis, credit squeeze and subprime market problems are all expected to help fuel various forms of litigations. The defence firms are presently faced with a prisoners dilemma, whether to settle a billion dollar suit immediately for millions or contest the proceedings till the balance sheet improves. In both cases, with the numerous government initiated inquiries revealing damning evidences and signs of judgment lapses, the plaintiff firms are laughing all the way to the bank.

Mergers & Acquisitions

While the previous waves of Mergers & Acquisitions were driven by strategic needs for expansion, the driving motive behind the present wave is survival. This has given rise to an entirely new set of expertise amongst the deal makers, with lawyers and bankers running against the clock (at times with the backing of the Federal Government as in the case of Merrill Lynch) to close the deal before the company closes down. The antitrust defence of ‘failing firm’ has acquired a wholly new dimension in the present turbulent times. The present wave of mergers would slowly give way to consolidation which would result in crystallization of market powers in few key players, thus again giving rise to monopolistic and abuse of dominance concerns resulting in rise in antitrust practice.

White Collar Crimes Practice

When the price of the scrip disappeared in hitherto unforeseen proportions, it was only natural to expect retaliation from a disgruntled class of investors. The call for retribution has resulted in a tremendous influx of meritorious and not so meritorious civil and criminal complaints against the financial executives. Additionally, the litigation avoidance strategy is at an all time high in the corridors of the financial institutions. White-collar defense experts are helping a wide range of corporations to put their house in order by conducting internal investigations in anticipation of potential litigation. It is widely anticipated that government probes could result in some criminal charges against financial executives. These scary times for the financial community have resulted in a bonanza for the defense law firms who are racking up previously unimaginable billing hours.

Those that remained unaffected…

In every law firm worth its salt, there are bread earning practice groups and then there are the star practice groups which carry the day. While the star practice groups like securities transactions and capital markets might have taken a hit because of the present downturn, the bread earners like product liability, mass tort litigation, international trade etc. are growing at steady pace. In fact, the credit crunch and massive restructuring exercises are bound to result in quality control issues amongst the manufacturers, thus bringing an upswing amongst tortuous claims of product liability. Further with the global economy still reeling under the economic crisis, countries are fast adopting protectionist measures in form of dumping duties, higher tariffs and discriminatory implementation of existing tariff on the basis of the sub classifications of the Harmonized Tariff Schedule prescribed by World Customs Organization. These protectionist measures are bound to give rise to international trade wars, increasing trade litigation and regulatory work for the law firms.

New practice groups

Sub Prime Practice

If there is one art the law firms specialize in, it is that if life throws lemons at you, make lemonade. While the Sub Prime crisis might be a horrifying experience for all concerned, the lawyers are busy making hay while the sun shines. The subprime financial crisis has created a wave of global litigation and heightened governmental investigations. Dedicated teams are busy advising Wall Street banks on the numerous lawsuits against subprime mortgage lenders to repurchase their loans. Regulatory lawyers in D.C. are busy addressing Congress’s concerns. The ‘new’ subprime practice group is a distilled product of the expertise acquired in various practice areas like bankruptcy, tax and corporate advisory. In other words, even if a particular area is seeing a lean period, the lawyers are quickly implementing their expertise elsewhere in accordance with the laws of demand and supply.

TARP Practice

A $700 billion dollar bailout is bound to attract legal attention before anyone else’s. As a result, firms across America have set up specialized desks/practices dealing with the Federal Government’s Troubled Asset Relief Program (TARP) related queries 24/7. The TARP money is bound to generate sale of bad leveraged assets and new acquisitions as part of its Capital Purchase Program. Additionally, the companies were frenetically seeking legal advice on the pros and cons of participation in the TARP before the November 14th deadline. The $700 billion government bailout of financial firms is expected to create tremendous legal work as law firms advise companies on how to participate in the rescue and navigate any long-term regulatory changes expected to result.

Executive Compensation

The public outrage against Wall Street is reflected in the TARP’s ‘clawback’ provisions. Previously, under the Sarbanes Oxley Act, 2002, the clawback provisions were only limited to the CEO and CFOs; however the TARP apart from ceiling the maximum executive compensation to an aided corporation, also provides for clawback of bonuses for other senior executives. The ‘carrot and stick’ approach of TARP towards executive compensation has added confusion to an already convoluted regulatory area, thus giving rise to specialists dealing with incentive compensation plans, deferred compensation plans and retirement benefit programs, complex employee investment vehicles and large-scale employee securities companies.

Government Advisory Practice

While this particular practice group always existed, it has taken on a new dimension in light of the economic crisis. The law firms are currently busy examining potential legal issues for state and local governments that have been stressed by the financial crisis. For instance, financially distressed states like California seeking financial aid from the Federal Government will require lot of legal support to make the pitch and carry out the transaction and structure the refund process.

Strategic Impacts of the Financial Crisis on the Law Firms

Cost Cutting Measures

The Rise of the Boutique Law Firms

In heydays, the corporate loyalty was at its peak. Leading Financial Institutions and Corporations used to rely on single and exclusive law firms to service all their legal needs regardless of the leading specialists in the particular practice area. However, the present downturn has turned out to be a game changer in this regard. Not only are the leading corporations negotiating tougher and reasonable billing rates, they are also reaching out to smaller and specialized boutique law firms for their customized needs. Increasingly, the Big Law Firms are encouraging the clients to ‘stratify’ their needs and are entering into tie-ups with regional law firms to service the specialized needs of the clientele. This includes document review, scientific review, depositions, expert witnesses and trials. As a result, the playing field has been leveled, and smaller firms are making pitches to big clients that would have previously fallen on deaf ears.

The LPO Advantage

The much frowned Legal Process Outsourcing industry is fast turning into a money and face saving mechanism for the international law firms. The entry of magic circle and other big law firms in the realm of LPO industry at the time of financial crisis is not a coincidence. Stringent cost cutting measures imposed in the US and UK legal sectors are a boon to the fast growing LPO business. For example, the avalanche of securities litigation would result in humongous amount of paper that requires analysis so large, that few companies will have any choice but to look to alternative sources to perform critical discovery tasks.

Innovative Ventures

The complexity of the economic and regulatory framework that has arisen out of the financial crisis has given rise to innovative ventures offering financial and legal solutions. Some law firms like Adams and Reese based in Memphis have launched a bank loan participation program in collaboration with a number of banks to help banks with assets of $2 billion or less make loans they could not otherwise afford. In Los Angeles, the law firm of Manatt, Phelps & Phillips has joined forces with commercial real estate investment banking firm George Smith Partners to help borrowers restructure their debt. Other law firms have expanded their distressed assets practice in tie-ups with real estate firms to offer a convincing restructuring program.

Financial Crisis- The Game Changer

The legal response to the financial crisis has required the firms to come up with a multi-disciplinary response teams and the firms have been more than happy to answer the call of the economic doomsday. The nature and magnitude of this crisis was unprecedented, it has essentially destroyed the American financial wealth generation model. The massive global legislative and policy response, including the $700-billion rescue plan, Recovery Refinancing Programs, Bank/Dealer Lending Programs and Securities/Loans Purchaser Programs, have created a host of both issues and opportunities for financial institutions, consumers and businesses. It would take a legal team of enormous expertise to navigate its clients safely through the murky waters of financial crisis. Some of the requisite expertise to tackle the crisis was always there with the law firms, the rest they are making up/acquiring as they go along. If there is one group which believes in the cliché, ‘Never let a crisis go waste’, it is the lawyers.

Author: Pankaj Parnami, Founder Director, KPO Consultants

About KPO Consultants

KPO Consultants is the pioneer consulting company which provides business solutions exclusively to the LPO industry. We work with the established and aspiring LPOs to set up their LPO ventures and overcome their complicated business problems and also help management make big decisions affecting top line growth of their company. KPO Consultants offers consulting in areas of strategy, operations, technology, marketing and sales, human resources, and strategic alliances. We also provide end-to-end support across entire business lifecycle; building business synergies from the scratch till realization of its benefits and ongoing developments. We have served several clients in the United States, the United Kingdom, Singapore, Philippines, Mauritius, India, Canada, Australia, and many more countries.

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