Linklaters has emerged as the first magic circle firm to litigate against a bank since the credit crunch, after accepting an instruction from Barclays Capital in a major dispute with US investment bank Bear Stearns.

The City law firm is advising long-term UK client BarCap, which filed a claim against Bear Stearns at the end of last month in relation to two collapsed hedge funds exposed to the sub-prime market.

Linklaters’ decision to act will be closely watched by rivals, many of which believe there could be a sharp rise in inter-bank disputes as a result of the current economic climate.

BarCap alleges Bear Stearns Asset Management used the highly-leveraged funds, reportedly worth $20bn (£10.16bn) in assets before their collapse, to unload risky assets that could not be sold to other investors. The claim form says: “This action arises from one of the most high-profile and shocking hedge fund failures in the last decade.”

The Linklaters team is being led by New York co-managing partner Lawrence Byrne with Wilmer Cutler Pickering Hale and Dorr defending Bear Stearns. The instruction is a coup for Linklaters’ US practice, which was chosen over local rivals on the case. Linklaters is understood to have acted for Bear Stearns in the past.

Linklaters litigation partner Christopher Style told Legal Week: “We have procedures in place to make sure the firm complies with conflict rules and agreements with clients. We make our decisions on a case-by-case basis.”

Inter-bank litigation caused by the credit market turmoil has become a dilemma for the UK’s commercial legal industry and a number of firms have reviewed their policies. Many eyes have been on the magic circle firms, which are known for their strong banking relationships. Freshfields Bruckhaus Deringer is thought to be opposed to acting on such disputes while Allen & Overy has said it would litigate against a bank in limited circumstances.

Last year litigation leader Herbert Smith launched a consultation on the issue, while Barlow Lyde & Gilbert and SJ Berwin have taken on instructions that could result in litigation against banks.

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Comments

The issue is predominantly a financial one. It will be rare for a major law firm to jeopardise its banking client relationships by agreeing to sue a bank which has the potential to give it tens of millions of pounds/dollars in fees over several years for the sake of a piece of litigation which by its nature is likely to be one-off and of indeterminate duration (and hence fees) because it could settle at any stage. So this Links case is likely to be rare. There are however a number of City law firms (such as Fox Williams) which are not subject to these client conflicts and therefore able to act against banks.

Posted by: Tom Custance, Head of Dispute Resolution, Fox Williams LLP on 18 Jan 2008

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