RSS FeedTwo AIG Subsidiaries Agree To Settle Racial Discrimination Case
This is part of the Middle Passage Law Series and is cross posted on Commercial Law International .
American International Group, better know by its acronym AIG, it seems these days can rarely catch a break. It just seems negative news follows negative news for this company. This time the negative news for this too big to fail company – deeply wounded by the global credit crunch and later recession – has two of its units being accused of racial discrimination in their lending practices.
It is important to note that AIG has not been found guilty of anything; in fact it wasn’t even accused of any wrong doing.
WHAT?
I know, I know, it seem like I am saying that AIG is involved yet not involved in this case. And yes that is exactly what I am saying.
All of this may seem totally contradictory but let me assure you it is not. What we have here is a classic illustration of legal reality vs. public perception of a company’s brand. In order to be successful companies have to be mindful of the differences between these two concepts and effectively manage their interrelation.
The Department of Justice (DOJ) allegations were never directed at AIG, the parent company, but were instead directed at two of its subsidiaries –AIG Federal Savings Bank (FSB) and Willmington Finance Incorporated (WFI). Both banks were accused of not sufficiently monitoring the activities of mortgage brokers who sold mortgages that they funded. The brokers were, according to the DOJ, offered African-American borrowers less favorably borrowing terms than similarly financially situated whites. The two have agreed to settle the case with the DOJ and have agreed to pay at least $US6.1 million without admitting liability as part of the terms of settlement.
The case broke no new ground as far as banks in the US being accused of racial against minorities, namely African-American and Latino-Americans, in fact similar settlements or even full blown litigation involving other US banks will surely be making the headlines in the near future. The case however did break new legal ground in that for the first time US authorities held a lender directly responsible for the racial discriminatory acts of brokers. As a consequence, from now on banks will have a positive duty to monitor the activities/policies of brokers that they fund, to the best of their ability, in order to ensure that they are not using race to determine borrowing terms. This duty also of course carries with the co-duty to take positive action whenever a bank believes that a broker is using race.
From a strict legal perspective AIG, the parent, hands remain totally clean is this matter. It is important to reiterate that AIG was never accused of anything; the allegations were solely directed at the two subsidiaries. And no this is not a simple matter of splitting hairs, while related all three companies are separate. The legal concept of the corporate veil - the independent legal identity of companies, even if related – is a fundamental one in corporate law. The corporate veil is best understood as a shield that is used to protect all the right that come with incorporation. This is not to say that it can never be lifted/pierced, for it can, but this is only done in rear and specific instances where for example fraud is alleged or where for some reason the directing/controlling mind of a corporation needs to be identified.
However, these allegations go beyond strictures of the corporate veil and this is where public perception of the brand and effective management of that brand become important. AIG and its army of brand management specialists both know that the general public are often not so discerning as to make the distinction between parent and subsidiary; as far as the public is concerned AIG is AIG. This is the reason I believe that there was such a quick settlement – the last thing AIG, the parent, needs is a protracted legal battle involving accusations of racial discrimination, albeit involving subsidiaries. This would be a public relations nightmare.
As companies battle the recession, bartering comes in handy
First posted on Commercial Law International on Feb 24, 2010.
By: Carsten Lexa
Money helps a lot when it comes to exchanging goods. One buys the goods, pays with cash and takes the goods away. So far, so good. But what if free cash to spend is a rare thing? For example in times like today, when the economy is not doing well and money is scarce?
Today, more and more companies turn to third party networks to contribute and use barter schemes. Of course, bartering is nothing new: It is a medium in which goods or services are directly exchanged for other goods and/or services without a common unit of exchange, e.g. money (according to Wikipedia). Firms routinely arrange exchanges on their own. But cultivating relationships with business partners in such a way, that barter schemes can be discussed and established among each others takes time and presents numerous hurdles. Let´s assume the owner of a restaurant needs printing services with a value of $ 10.000,00. Where can he find a printshop with an owner who is hungry for a $10.000,00 meal?
Formal barter schemes can help. One of the biggest providers for example is Bartercard, the largest exchange network with trades through its network worth more than $ 2 billion and 75.000 members in more than 9 countries. By using such a provider, the restaurant owner in the example above would owe $ 10.000,00 to the exchange network, not the printshop. The provider provides the business partners and makes sure that every member of the network honors the services of the other members. It therefore provides security and accountability, something informal bartering cannot provide in an adequate way.
What are the additional advantages of such barter schemes, other than security and accountability? The biggest advantage is the fact that no money is needed to “pay” for services and goods. Another one is the fact that a member can “buy” services first throught the network and pays later in his own services and goods – sometimes months later, if nobody wants his services or goods earlier. And finally such a scheme can work not only in one country, but – ideally – worldwide, as long as the members accept the scheme.
Even in Germany such barter schemes are tried and – especially among small and midsize compamies – found helpful. But currently, no big exchange networks exist. So, member of traditional business networks try to establish their own barter networks. Reason is that a company owner who knows another company owner through a traditional business network and has done business with him in a traditional way using cash will be more open towards doing barter transactions with this person than with a total stranger.
Is barter the holy grail for companies in recession times? Probably not. But it can be a helpful to do business if cash is scarce. The difficulty is to find the right partner.
For inquiries please contact the author: kontakt@kanzlei-lexa.de
New Bob Marley Brand “House of Marley,” Heirs Take Steps To Protect Father’s Legacy
First posted on Commercial Law International on Jan 7, 2010.
“Old pirates, yes they rob I.”
The opening words to Redemption Song are as hard hitting now as they were when first bellowed by the iconic musical legend – Bob Marley - years ago. These words however may be taking on a new meaning in this era digitization and globalization where information is king. This era is all about IP – Intellectual Property – and the right to access, control and exploit for ones own benefit the concepts encapsulated within creativity.
As a matter of course the Brand – how you package and sell your IP, in fact branding itself becomes a form of IP – in this era becomes of great import. In fact one could argue that brand is not the everything but is the only thing. Consumers no longer simply buy a product or service – no, no – rather they are buying a brand.
Now this brings me to the House of Marley. The heirs of Bob Marley – the holders of the exclusive rights to the reggae superstar’s image – are drawing clear battle lines in the IP war on whom can access, control and exploit Marley’s iconic status. They have enlisted the aid of Canadian private equity firm Hilco Consumer Capital to package, manage, market, sell, monitor and protect the IP that is Bob Marley through the products sold under the new House of Marley brand.
Rather than attack the hawkers of existing wears, which would result in a multiplicity of protracted legal battles spread-out across the globe, Hilco and the House of Marley have instead embarked on a branding campaign. It is quite simple, the House of Marley will be authentic and all other comers will only be imitators – a potentially very lucrative strategy, if it can be pulled off.
According to reports, the Marley brand – name, sound and image – are estimated to generate $USD 600 million in a year and this is on the bootleg side alone. On the legal side, the brand generates a profitable but substantially smaller $USD 4 million a year.
With numbers like those no wonder the Marley heirs sought out and gained a partner like Hilco with a proven reputation in IP generally and branding specifically?
While I applauded this new venture, I can’t help but how long will it be before we see a court case or two? Maybe a few Anton Piller orders – best described but somewhat inaccurately as a civil search warrant, that feature so prominently in IP cases – or maybe the odd Mareva injunction – a court order freezing assets -?
The reason why I am thinking this is that it is impossible to escape the fact that branding – intellectual propertization – eventually means not only the allocation of exclusive rights but also the enforcement of those rights.
Indefeasibility of title? Not that indefeasible in Kenya?
First posted on Commercial Law International on Oct 15, 2009.
By Charles Wanguhu
The caveat emptor rule dictates that an individual seeking to purchase land should ensure that he is dealing with the rightful owner. Therefore upon inspection of the register kept at the ministry of lands, an individual seeking to ensure the ownership of land would request the registrar for an official confirmation of search, the advantage of the official search is that it is given priority registration over all other transactions for a period of 14 days from the issue of the search.
However in the Mau forest in Kenya the government aims to evict thousands of families who are said to be on forest land. This is despite the fact that some of the settlers have valid title for the property which was a result of excision of forest land by the previous administration. A similar operation in 2005 resulted in thousands of people being displaced and claims of human rights violations by the evicting forces.
The new administration however views the issuance of the titles as void as in their view they were illegally obtained from the former administration. However, under the Principle of Indefeasibility the title of an innocent Purchaser cannot be set aside, even by the claims of a previous rightful owner. This is so, because the Register of Titles is conclusive evidence of the Purchaser’s rightful ownership of the land.
In the case of Maathai & 2 others v City Council of Nairobi & 2 other 1994 a case in which the Nobela laureate Waangari Maathai sought to stop the sale of a piece of land by the city council the court in its deliberations held that:
Registration of Titles Act Cap 201 of the laws of Kenya which provides inter alia, that the certificate of Title issued by the Registrar to a purchaser of land upon a transfer shall be taken by all courts as conclusive evidence that the person named therein as proprietor of the land is the indefeasible owner thereof …. and the title to that proprietor shall not be subject to challenge.”
The Kenyan government while well intentioned in conservation of forests has opened a pandoras box and thereby creating uncertainty in dealings in land. By ignoring the indefeasibility of first registration land transactions have become a gamble. A commission of inquiry into illegal/irregular allocation of public land revealed that a number of foreign embassy and consulates are actually built on former public land. It would be interesting to see whether the government would take similar measures against these missions as they are attempting to do with the families in the Mau forest.
An AFRICOG report available here looks at some of the recommendations of the Commission of inquiry and looks at the possibility or impossibility in implementing the recommendations.
August 1: A Day Of Remembrance
This is part of the Middle Passage Law Series and is cross posted on Commercial Law International.
Why am I wearing all black today?
Am I in mourning? No, not exactly. Then why?
Well it is August 1: Emancipation Day. 
I am wearing black today not to so much mourn but to remember. To remember that it was today 175 years ago that the British set my ancestors free – well in a manner, they still had six years of apprenticeship to look forward to. Why? Because being free people made them some how forget all the skills acquired during a lifetime of toil.
The Slavery Abolition Act 1833 took effect one year after passage this day 1834 and outlawed slavery in the British empire – including British North America aka Canada – with the exception of all but a hand fully of territories.
So I remember – let’s remember together.
Does The Future Of The Revised US-Swiss Double Taxation Treaty Depend On The Outcome Of The UBS Case?
First posted on Commercial Law International on July 13, 2009.
UBS, the world´s largest wealth manager, has found itself embroiled in a diplomatic row between Washington and Bern. At issue is the interpretation of the current US-Swiss double taxation treaty and at stake is the newly inked, yet to be ratified, revised US-Swiss double taxation treaty.
Does the future of the revised US-Swiss double taxation treaty depend on the outcome of the UBS case?
As much was indicated by Doris Leuthard, the Swiss Economy Minister, as she called for a speedy resolution of the case. What the Minister is expressing in her pronouncements is simply the reality of the situation. Swiss maintain that the issues in the case are diplomatic and ought to be resolved in forum more appropriate to friendly relations between nations – face-to-face closed door negotiations – rather an the public spectacle of a courtroom. Secondly, while the treaty has been finalized it has yet to be ratified by the Swiss Parliament, a parliament that will be slow to give its blessing if it is dissatisfied with the outcome of the case.
So what exactly is going on in this case? This is a very good question for I myself was a bit confused for two reasons. The first is that UBS already plead guilty to assisting thousands of Americans to evade US taxes in a case brought by the Department of Justice (DOJ) in February of this year. In the same case it also paid fines of $750 million and disclosed 250 names of its US clients. So the case ought to be over, right? Well, yes and no. This was the criminal leg of the – and I am going to substitute strategy here for case to avoid any legal confusion – US authorities strategy to gain the names of as many as 52,000 believed to be evading US taxes.
The current case before the courts is the civil leg of the strategy brought by the Internal Revenue Service (IRS). They have served on UBS a John Doe subpoena in an effort to force UBS to reveal the names, so those people can in turn answer to the authorities.
While I know that criminal and civil matters are wholly different creatures, this smacks of double prosecution – persecution if you will. Or is it?
The second thing that was puzzling me was this IRS case seems to have stepped outside the four corners of the existing double taxation treaty. The treaty only requires UBS, through Swiss authorities, to co-operate with US tax evasion investigations if the IRS can provide the specific names of the holders of secret offshore accounts. It is clear from the IRS´s actions, issuing a John Doe subpoena, that it clearly does not know the names of the suspected tax evaders. So that should be the end of it, right. Well, clearly not.
Now, what the IRS is doing is clearly is not only not double prosecution/persecution, it is well within, I believe, the scope of the treaty. In fact I would go as far as saying that it is share genius. This was revealed to me in a brief filed by the IRS in response to one filed by UBS. To see what I mean just take a look at section 2 of the brief, the head tells it all: ¨Nothing in the Tax Treaty Limits the IRS´s Authority to Enforce a Duly Authorized Summons Issued to a Third-Third Party Witness within the United States, or Requires the IRS to Exhaust its Treaty Rights With a Foreign Government Before Seeking to that Summons.¨
Unfortunate for UBS, and as rightly pointed out by the IRS ¨the existence of a treaty….does not limit the rights granted to the United States under the laws of this country¨ (the bold being original). Well, that is in part, it should read doesn’t limit those laws so limited by treaty obligation.
What the IRS has done is not too circumvent the treaty but simply not to bring it into the equation at all. It has kept the issue entirely domestic. As I said, share genius.
In any event the prospects are dim for UBS if a negotiated settlement is not reach soon. If UBS loses, which it looks increasingly probable, it will be faced with either defying US law by refusing to reveal the names or reveal the names and be in violation of Swiss banking law which carries with criminal sanction.
Now that a Floridia judge has agreed to postone the case the excutives at UBS will surely be working over time to reach an amecible resolution of the case.
L´Oreal Found Guilty Of Racial Discrimination
This is part of the Middle Passage Law Series and is cross posted on Commercial Law International.
Now I know I have not posted a piece in this series in quite some time and for that I apologize – I have no excuse.
It may seem that I am either picking on L´Oreal, as I have tracked their recent legal battles with eBay on Commercial Law International, either that or I have an obsession with makeup. Let me assure you that neither in the case. With that over, let´s go to the story.
The La Cour de Cassation, the highest court in France, upheld the ruling by the Paris Court of Appeal, finding L´Oreal guilty of racial discrimination. The court also found Adecco, a temp-employment agency, involved through its Districom division, guilty and fined both it and L´Oreal €30,000. The court however, sent back to the Court of Appeal for its reconsideration the €30,000 each in damages payable to SOS Racisme, an anti-racism public interest group that brought the case.
The ruling ends three years of legal wrangling and is no doubt a huge blemish for L´Oreal.
The main issue of fact in the case was BBR. Yes, BBR. What in the world is BBR, you ask?
BBR or blue, blanc, rouge – the colors of the French flag. Now if you were to ask me I would have simply thought that this was a general patriotic gesture, however, it hides a much more sinister meaning. It, as the Times reports is an expression ¨widely recognized in the French recruitment world as code for white French people born to white French parents.¨ This would of course exclude not only the 4 million ethnic minorities current living in France but also any whites not born of pure French stock, including presumably none other than the French President himself Nicolas Sarkozy whose father is Hungarian.
It would seem that word got out that L´Oreal did not want any black, Asian or Arab sales staff to promote Fructis Style, a hair care product made by its Garnier division. Only BBR would do, I guess – because they are worth it – to play on L´Oreal´s because you are worth it ads. But, why?
And this for me is the most troubling aspect of this case. The BBR move by L´Oreal hints at a much larger and disquieting issue in French society. Yes, racism, this is very obvious but much more than that it is brand of racism that operates not just on the fringes of society but at its heart – in the labour and retail markets – while at the same time managing to remain in the shadows .
How is it that this BBR policy that so pervades the French employment and retail markets is only now seeing the light of day?
Like I said, very troubling indeed.
However, a silver lining to all of this is that BBR has now been fully exposed in a court of law. From now on the racial prejudice that operates in the French labour and retail markets can no longer be subject to denials of anecdote or conjecture. The court record stands as an official record by the state that BBR does exist and is a proven fact.
As for L´Oreal, this cannot be good for its brand management. For a company that so fiercely defends its brands, just take a look at its battles with eBay, this was not only a poorly conceived recruitment drive but also incorrectly defended case – this is not to be read as a dig at L´Oreal´s lawyers, not at all, I am sure they represented their client the best way they could, however, I am unreservedly criticizing L´Oreal.
L´Oreal forgot that it´s all about the brand. What they sell is much more than simply a product, it is a lifestyle, it is instant gratification, it is control and it is improved self-confidence through a line of beauty products designed for one thing – to improve the true beauty that is you. Nothing can be allowed tarnish the brand less they lose sales and market share.
If this is the basic market reality of the L´Oreal brand, and for that matter any brand, why would you maintain the spectacle of a public trial for three years with a case that even if it comes out in your favor could still blemish the brand?
There is no doubt that L´Oreal´s PR team is hard at work trying to figure out how to either make this go away or finding an angle on how to spin this. A word to the wise, L´Oreal, you have already been found guilty, it would be an exercise in futility to deny any part of this. In fact such a denial, in whole or in part, direct or indirect, could result in a backlash against the brand. It would be better to fully accept culpability, say sorry and take positive and no doubt public steps in order to combat BBR or other forms of discrimination. That my friend is your angle.
Australian Securities Regulators In Policy Quandary
First posted on Commercial Law international on July 1, 2009.
The question that faces Australian securities regulators is what to do about two or more Chinese state owned enterprises together owing substantial shareholdings in an Australian company?
At first blush it would appear that this is a case of China take over fear, however there is much more to the story than this. Indeed, there is a legal/regulatory story here as well. Now I am not trying to say there is or isn’t a China phobia here, it is a given that all nations have their own xenophobic tendency, however I cannot speak on this as I know very little about Australia and what I do know comes from watching Rugby, Crocodile Dundee and Steve Irwin (may he rest in peace). Moreover, while I am not versed in Australian law, I believe that my legal training and experience thus far permits me an insightful comment or two.
This question has come to the fore because of the increased interest of Chinese companies in Australia´s mineral wealth – this is in fact a global trend and not one peculiar to Australia – just take a look at the recent attempt by Chinalco to increase its stake in Rio Tinto to see my point.
In Australia it isn’t that two or more state entities is per say barred from investing in the same company, as the law currently is, not at all. Then what is the problem, you might ask? The issues here are the concepts of associated entities and substantial shareholdings.
You see in Australia, under their securities regime, two or more entities that are associated – related in some way, namely through ownership and control – that combined own more than 5% of a listed company must declare a substantial shareholding. However, due to a lack of clarity in the law and the absence of a clear policy position the question remains open if two or more Chinese state owned companies would be considered associated and required to declare a substantial shareholding?
The securities regulators face several related sub-problems and they must approach this issue with some degree of sensitively to the political nature of dealing with entities belong to another state. With that in mind regulators have to be cognizant of the fact that they are not dealing with subsidiaries here but foreign state owed companies; state ownership is not equal in all these enterprises; state control is not equal in all these enterprises; and these enterprises while having the same state owner might indeed be fierce competitors with opposing interests.
I do not envy the regulators their task but it will be interesting to watch what if any policy position is developed or if the law is changed to address this issue.
The Swiss Banking Business Model Faces Realignment
First posted on Commercial Law International on June 29, 2009.
The world economic down turn has had many knock on effects, many of which unexpected. It seems that bad times has the uncanny effect of making the once unthinkable, unsayable and undoable all very much possible.
The Swiss banking model can be best characterized with one word: Secrecy.
This don’t ask, don’t tell attitude is more than just a business model – it is enshrined in Swiss law. The high protection that client confidentiality receives in Switzerland has made it a favorable destination for the money of my high net worth individuals wishing to shield their money. Also it doesn’t hurt that it also has a very favorable tax policy as well.
This Swiss shield unfortunately is not very discriminating – it basically protects all comers. It makes no distinction between those who wish to shield their money for legitimate or illegitimate purposes. Moreover, it doesn’t even a make a distinction between rightfully and ill gotten gains. This hands off approach while very profitable has lead to some very tragic and embarrassing incidents for Switzerland. Specifically, I am mainly speaking of Nazi accounts filled with plunder during their rise and fall but generally I am also referring to Swiss banks being the preferred destination for the money of certain criminal elements and many a dictator.
Please don’t get me wrong, I am not trying to say that the Swiss actively seek out ill gotten gains – to my knowledge they do not – nor am I saying that they have done nothing to try and rectify ill gotten gains ending up in their banks, I am not trying to say that at all. Then what am I trying to say?
What I am trying to say is simply this: any system predicated on secrecy will have its limits on how well it can tackle the twin issues of legitimacy and source of funds.
However, times they are a changing.
This change is evidenced by four things. The first is a long and as yet to be resolved battle between UBS and US authorities over the names and identities of some of the banks US clients and with it opposing interpretations of the US-Swiss Tax Treaty. The second is the OECD´s tax haven black list, talk of G20 nations developing a sanctions regime aimed at tax heavens and the drive by OECD countries and in particular the US to conclude double taxation agreements. The third is the revised US-Swiss double taxation treaty. And lastly is the current economic climate.
All of this has forced the Swiss into re-think mode. As reported in the Financial Times: leading members of the Swiss Private Bankers Association have recognized they may have to raise tax compliance with clients and, if necessary encourage them to declare previously hidden assets.
Does this mean an end to secrecy as the cornerstone of the Swiss banking model?
Highly unlikely. However, it does mean a few rays of light into the otherwise dark room of secrecy called the Swiss banking model.
Mau Mau to sue the British Government
First Posted on Commercial Law International on June 24, 2009.
Concentration Camps
By Charles Wanguhu
The above move by the Kenyan freedom fighters to sue the British government has elicited some very interesting responses from some readers of the times online paper:
This is all about money and bashing the UK. Africa does not want to take responsibility for its current problems
Also if this happened in the 50’s so why have they waited till now?
Lawyers and Money again: A poisonous mix. Why after so long drag up these horrors. The Mau Mau allegedly used to drink the blood of the white farmers they killed. The British allegedly tortured Mau Mau. What good can come of this knowledge now? Time to put these things back in the box of history
While the above sentiments may be of a few it may be worth placing their arguments in a context. Firstly during the emergency in Kenya loads of kikuyu men were rounded up and accused of being Mau Mau based on accusations by guards who were collaboratoring with the british. We can therefore not claim that all those held in prison camps tortured and killed were indeed Mau Mau fighters.
Secondly what is more at stake is the recognition by the UK government that it was official colonial policy to run concentration camps and that it was sanctioned at the top.
In the article :
Professor Anderson states that is doubtful the lawsuit in its current form — targeting the state rather than those surviving individuals who allegedly carried out the abuse — will succeed.
“There can be no doubt that torture was used by British Forces . . . but the question remains ‘who is responsible?’,” he said.
Whoever this notion is flawed in that when a criminal offence occurs it is not the role of the victim to seek evidence against the offender and then bring in criminal charges against them. When a state decides to open up institutions of incarceration it is the states responsibility to ensure that the inmates are treated in a humane way and not subjected to torture. In this instance the British colonial state failed in their duty and they should therefore be brought to account for their inaction when it was clear what is happening. The Imperial Reckoning: The Untold Story of Britain’s Gulag in Kenya by Caroline Elkins is an account of the atrocities carried out on the Kikuyu population in Kenya and is worth a read for any individual prior to defending the british actions.
The Mau Mau atrocities cannot be denied and were definitely atrocious. It is however pretentious to claim that they were on a similar scale as the colonial state with their better equipped and organised forces. In addition the fact that they used Machetes and not guns is akin to declaring that the British killings were undertaken in a humane way.
The question is should it be placed in history and forgotten about? Well while seeming to take a leaf from its predecessors the Kenyan Government extra judicially killed up to 400 Kikuyu young men accusing them of being Mungiki (a group not too dissimilar to the Mau Mau if not claiming their inspiration from the Mau Mau) should we forget about them as well.
While it is in the interest of majority of British people to be forward looking, the victims of atrocities still seek justice. History appears to be relative as the World Cup win in 1966 is considered fresh enough to be brought up at every opportunity but atrocities committed six years earlier than the win are too far to be worth remembering.
The issue is not so much monetary compensation but recognition that it was official British Gvt policy to carry out such atrocities and that indeed the victims of these actions were in some instances innocent people who happened to be members of the wrong ethnic community at the time.
The Cozy Bank-Law Firm Relationship May Not Be So Cozy After All…These days Anyway, Part II.
First posted on Commercial Law International on June 17, 2009.
This is case that has the potential to redefine the very cozy relationship law firms have with their banker clients. No longer will bankers be given blanket coverage under conflict of interest rules to prevent law firms from being representatives in claims brought against them.
The operative word here being potential, as you shall will see.
The relevant facts of the case in brief are as follows: the defendants in the case included the underwriting syndicate of Gammon Gold´s public share offering. Two member of the syndicate included BMO Nesbitt Burns Inc. and TD Securities Inc., both subsidiaries of BMO and TD respectively. It just so happens that Siskinds, who represented the representative plaintiff, McKenna, in the class action, was concurrently retained by BMO and TD to undertake debt enforcement and personal bankruptcy matters. As a result the defendants raised the issue of conflict of interest, seeking to get Siskinds removed from the case.
The judge in the case, Madame Justice Lax, was having none of it; holding that there was no conflict. In her ruling Justice Lax made it clear that ¨the underwriters and banks are separate and sophisticated business and legal entities that are individually governed and autonomous. She went on to say further that ¨the banks had no reasonable expectation that their subsidiaries would be treated as clients.¨
And rightly so. While I fully agree with the judgment, it still remains unclear how it will be received by banks but more importantly, law firms. This is why I said it has the potential to redefine the bank-law firm relationship. It will all depends on how it is read. If the case is read very narrowly and confined to the particular facts of the case, that is where there is a parent and subsidiary relationship and they are separate, sophisticated business and legal entities, individually governed and autonomous, then there is no conflict. This is the extreme and I don’t believe that it will be this narrowly read. However, I do believe that there is the strong potential for it to be read narrowly enough as to preserve largely if not totally the existing regime. It will all depend on the mood (i.e. economic conditions) of the law firms I guess.
On the other hand, if the decision is read more globally, it could usher in a new era of freedom to act o the part of law firms. I hope it is the latter; however, I would not be surprised if it is some form of the former.
In a passing note in Part I of this post I referred to lawyers as attack dogs, this was meant as no offence – I even referred to myself as an attack dog in training. However it was said to provoke some self examination and self evaluation on the part of myself and those more senior in the profession. All too often clients see us in that role and we sometimes do little or nothing to disprove this perception. While I know that I have a long way to go in the profession, I am after all only an articling student, for me; a lawyer is an advocate, a professional that aggressively safeguards the interest s of their clients, however, this dusty must be balance against other professional and personal considerations.
Am I wrong or just being naive?
The Cozy Bank-Law Firm Relationship May Not Be So Cozy After All…These Days Anyway, Part I
First posted on Commercial Law International on Jun 5, 2009.
In Canada an Ontario Superior Court of Justice ruling (McKenna v. Gammon Gold Inc.) has the potential to go viral like the latest YouTube sensation and challenge what can only be called one of the most incestuous relationships in the commercial world.
What am I talking about?
Well I am referring to the relationship, the very close relationship, between banks and law firms.
Ever wonder why, if and when, a bank or other financial institution is being sued it is very rare to find a big name law firm representing the plaintiff but they are very much present to represent the defendant bank? This my friends is no coincidence, it is a deliberate strategy on the part of the banks and other financial institutions. They set out to exploit the conflict of interest rules that lawyers are bound by – a lawyer may not generally represent two clients on opposite sides on the same matter – and they do a very good job of it. This is evidenced by the fact that banks and other financial instructions will spread the legal work they have around to as many international, national, regional and local based (powerhouse) law firms as they can in any market they operate.
The strategy is simple but effective: tie up the biggest, the brightest, the best and if need be the most belligerent legal talent out there. The benefits of this strategy accrue to banks in two significant and interconnect ways. The first is that they have the best legal talent working for them on ordinary transactions while at the same time having them in reserve ready to be unleashed like a pack of attack dogs. The second, which flows from the first, is that having such well trained and impressive attack dogs – oh sorry, I mean lawyers – at the ready will and does inspire fear in not only prospective claimants but other lawyers as well (though most would not admit it).
The law firms are not entirely innocent here, in fact not at all. They are willing subjects or is that objects of the strategy to exploit the conflict of interest rules. They enter this relationship; in fact they actively seek to forge these links, with their eyes, arms and billable hour’s dockets´ all wide open. Law firms know that the work from the banks is not only constant but very lucrative as well, so they are more than happy to be attack dogs for hire.
However, we now live in different times, as this once cozy relationship is being undone or at least it has hit a rocky patch called the current global recession. Whoever first said: it´s all about the money was so right. It is indeed all about the money for both banks and law firms. The former having less work to spread around now is also lacking a commercial rational that would satisfy shareholder costs´ accountability of having such high paid attack dogs in reserve. Consequently, the banks are now looking to cut costs and have aggressively gone after external legal costs reducing the number of attack dogs – sorry, I mean lawyers – it holds in reserve and how much it pays them.
The law firms for their part, seeing the writing on the wall have, have begun to seek out other clients. In fact this has resulted in the once impossible, law firms, well at least in this case, have begun to represent claimants against the banks.
The conflict of interest rules once untested and applied broadly, I would say too broadly, to the bank-law firm relationship is now set for realignment. No longer will law firms simply refuse or not actively seek out work, simply because a suit might be brought against one of their clients. I know I am only an attack dog in training- pardon me, I should say student at law – but my reading of the conflicts section of the Ontario Rules of Professional Conduct does not support such a broad application. Provided the issues are not related, the clients’ information in possession of the lawyer bares no relevance to each other and the lawyers that handle each client´s matter are different, it is difficult to see where a conflict of interest would be created.
Thankfully I don’t have to stand alone in my opinion. I now have Justice Lax in McKenna v. Gammon Gold Inc. to back me up when she ruled that Siskinds should not be disqualified for a conflict of interest from prosecuting a class action against an underwriting subsidiary of a client bank that it acts for in separate matters.
And how so? Well you are just going to have to stay tuned for part two.
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