No smoke without fire? HSF and RBS set off judicial alarm

There is an interesting story in Legal Business about the conduct of RBS’s defence by Herbert Smith Freehills in a £4bn shareholder dispute. Hildyard J is reported as saying the following which seems to question HSF’s competence in managing their client’s disclosure* (it could of course be the bank’s fault, or the judge could be wrong):

what appears to be an unfocused disclosure process, which has fanned out exponentially and extravagantly without sufficient control and direction… the commitment of increasing resource to the identification of documents, leaving a diminished resource for their assimilation, without properly taking stock as to whether the process had overtaken the purpose.

But more importantly perhaps he says this:

…the lack of clear evidence is all the more worrying given the apparently small percentage of their allotted budget for witness statements the defendants’ legal team have so far spent on this process.’

And is reported as saying that:

some of the evidence provided by the defence has been both ‘unsettling’ and ‘less than compelling’, and cited a description provided of the pleaded issues as ‘incredibly broad and complicated’.”

Whilst there may be a number of explanations, one plausible one is that the mounting of a smokescreen defence, designed to wear down their opponents in the hope of a cave in or parsimonious settlement is being unpicked by the judge. Another is incompetence (in the bank – I know, unthinkable or at Herbies). A third is unfairness, or a rush to judgment, on the judge’s part.  There may be others. Place your bets and await the – now postponed – trial. The judge’s remarks may have made parsimonious settlement less likely, so perhaps the shareholders will get a more generous settlement and HSF and RBS’s woes will disappear.  That there may well be troubles to expose is suggested by this other remark attributed to the judge made by way of apparent preface for his criticisms. Hildyard said while prefacing his criticisms that the court does not,

intend by any means to peer behind the curtain of legal privilege.

Perhaps someone should. Perhaps he means yet.



* An interesting point that was made to me shortly after the blog was published was that RBS (or indeed HSF) may have contracted the management of parts of the disclosure process out – if so an interesting example perhaps of the perils of unbundling.

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Innovation Reification

Those of you who follow my work closely (*hello mum and dad*) will observe that I am a cautious proponent of innovation but – because the day job demands it and because it is interesting- I also spend some time talking and writing about the ethics of innovation.  Our beloved regulators have, if I can put this in my most professorial style, bigged up innovation fairly relentlessly and on flimsy evidence, and I think we need a more cautious, measured and forensic approach to building an ethically innovative legal services system and market.  So I read this in the Harvard Business Review and have summarised it quickly for interested parties:

Why Creative People Are More Likely to Be Dishonest

Lynne C. Vincent and Maryam Kouchaki point out the considerable potential benefits of innovation and then come to their central point:

…being creative also has an undeniable dark side—one that can be very costly for companies if left unchecked. Research has shown that while creative people are adept at coming up with new ideas, they can also be more likely to engage in morally questionable behaviors.

They identify studies by Francesca Gino and Dan Ariely showing that creative thinkers are better at rationalizing dishonesty and that “thinking outside the box” may lead to a greater propensity to act unethically.  Vincent and Kouchaki claim:

This is because, at least in the U.S., creativity is often celebrated as a special attribute. The idea that creativity is rare leads to a sense of entitlement; if you are creative, you see yourself as more deserving than others. Leaders reinforce this when they don’t hold creative people to the same rules as those who are less creative, or when they give them special treatment. Steve Jobs even had a habit of parking his Mercedes in handicap parking spots and driving it without a license plate.

Similarly, creative people may grant themselves a moral licence

Basically, it’s not just that creative people can think outside the box; it’s that people who see themselves as creative and see creativity as rare believe that they deserve a bigger box than others. And what is more troubling is that they might be willing to steal and lie as a result.

The conundrum from a policy (or business) perspective is rule-breaking can lead to better solutions, services or products but they can also (or alternatively) lead to ethical detriment because, “people who see themselves as creative will feel entitled and act dishonestly.”  Although the research does not cover it, we might suspect that this moral licensing might be mean that innovators are even more inclined to disregard rules that deal with behaviour less serious than dishonesty.    A key to mitigating or encouraging this dishonesty was whether the creative person was encouraged to feel a stronger sense of entitlement.  They also found that, “when people think they are in the company of other creative people, they don’t feel entitled to different standards and benefits.”

It is of course hard to put a price on the detriment associated with  creativity.  We could take the view that the costs are worth the benefits. Though, of course, we can’t really put a price on the benefits either.  A compromise may be prudent:

Given the benefits of creativity, leaders have to encourage their employees’ imaginations. But perhaps the key to avoiding entitlement and unethical behavior is to make sure more employees see themselves as creative, so teams understand that it’s not a skill reserved for only a privileged few.

And the authors make four suggestions as to how to do that:

Carefully define what creativity is and is not. Our results demonstrate that the definition of creativity is not fixed and can be changed. While creativity involves a certain degree of risk-taking, managers should make clear that taking risks does not mean ignoring the rules and moral guidelines.

Emphasize that creativity is a skill that everyone can tap into. Thinking creatively can be a discipline and an ordinary everyday behavior. It is not reserved for a creative elite.

…Emphasize a team and organizational identity of creativity. …If organizations create an organizational identity that “we are all creative,” creativity is seen as more common, but that doesn’t make it any less valuable.

Don’t give people special treatment. Executives and team leaders need to clearly define the boundaries between ethical and unethical behaviors. This reduces people’s ability to redefine what is acceptable, and this gives employees the courage to hold people deemed “creative” to the same rules as everyone else. If the lines of morality are strong and clear, it is difficult to successfully create a bigger box through dishonesty.

Reifying innovation is dangerous.  Suggest these problems to innovators and they tend to say.  We can’t be more unethical, we’re the good guys. We’re different. We’re taking on the Old World. Innovation evangelism needs a calmer, more self-reflective side.

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Diversity Dunces

The Lawyer’s diversity audit makes familiarly depressing reading with this particular gem catching my eye from a head of global diversity in a leading law firm about positive action discrimination to counter the self-limiting lifestyle choices of womenactual discrimination:

“Those people would never know if they got the position because they were the best person for it or if it was just because they were a woman.”

Whilst research and the lived experience of most sentient human beings suggests rather firmly that this must already be true of plenty over-promoted males, and that, yes – our natural resilience* has meant we have learnt to cope with it, it’s a bit worrying when a head of diversity spouts such an irony free, gendered view of the world.

There is a hope he’s been quoted out of context but one might expect these champions of change, promoted to positions of great import* might be a bit more communication savvy. Though perhaps not, as the Lawyer clearly felt Christmas had come early when they wrote down this quote from another male champion of the downtrodden sisters. “Quotas are binding and they force a numerical situation in a sense.”  He so clearly gets it, don’t you think?

Having sat rather uncomfortably on the fence for rather a long time, the level of analysis and understanding demonstrated by the menfolk seeking to lead on the anti-quota’s argument is driving me ever so slightly reluctantly into the arms of the Quota feministas.*  That and Rosemary Martin’s (GC of Vodafone) view of quotas, offered at a recent conference organised by the ever excellent 100 years campaign, she was asked – I paraphrase – were quotas to be deprecated or were they necessary? Quotas were definitely to be deprecated, she said, but more importantly they were also absolutely necessary.


*irony alert klaxon

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Privilege Games: In advisers we trust?

Two quotes on legal professional privilege caught my eye this week.  First this from two lawyers at Herbert Smith Freehills (HSF) about the decision in Property Alliance Group Limited v The Royal Bank of Scotland Plc [2015] EWHC 3187 (Ch).  For now, what interests me is the claim made by the HSF folk that:

The decision is particularly helpful in recognising that the policy justification for privilege applies equally in the context of regulatory investigations, where the public interest will be advanced if regulators can deal with experienced lawyers who can accurately advise their clients how to respond and co-operate.

It stood out because of this in the FT which reports Jamie Symington, the FCA’s head of investigations:

Some companies try to claim legal privilege — the principle under which communication between a client and a lawyer is confidential, even in investigations — over the first interviews of key witnesses; while others have refused to hand over a written report to the FCA, instead demanding to only read aloud the results.

“The gaming of the process to shroud the outcome in legal professional privilege is unwelcome,” said Mr Symington at the same conference. “It is absurd to suggest we should operate in this way in this jurisdiction,” he added, of attempts to merely read aloud results.

It comes in a week when the conduct of Freshields and Holman Fenwick Willan LLP were found by the Panel on Takeovers and Mergers to have given rise to a number of breaches of (what the Panel regards as) important provisions in the introduction to the City Code on Takeovers and Merger.  The Panel found that, “their respective conduct was sufficiently serious to merit the issue by the Panel of a statement of public censure.”

Part of their concern relates to para 9(a) of the introduction which requires this:

“The Panel expects any person dealing with it to do so in an open and cooperative way. It also expects prompt co-operation and assistance from persons dealing with it and those to whom enquiries and other requests are directed. In dealing with the Panel, a person must disclose to the Panel any information known to them and relevant to the matter being considered by the Panel (and correct or update that information if it changes). A person dealing with the Panel or to whom enquiries or requests are directed must take all reasonable care not to provide incorrect, incomplete or misleading information to the Panel.”

My reading of the Panel’s findings is that in (if I may borrow the phrase above), “deal[ing] with experienced lawyers who can accurately advise their clients how to respond and co-operate,” advocacy for the client and candour with the regulator came into tension and advocacy for the client won. In situations of great complexity, where lawyers have a subconcious tendency to frame problems to the benefit of their client and a significant commercial pressure to advance the client’s interests, we should be wary of thinking that professional ‘objectivity’ serves the public interest.  Nor do we have to perceive a cynical conspiracy by malevolent lawyers to take this view.  As the Panel concluded

…by failing to disclose to the Panel information known to it and which the Panel considers to have been relevant to the possibility that the Indonesian Parties would be regarded by the Panel as acting in concert, and in not taking all reasonable care not to provide the Panel with incorrect, incomplete or misleading information relating to the Forward-sale Arrangements and their purpose, each of Credit Suisse, Freshfields and HFW did not satisfy the requirements of Section 9(a) of the Introduction. However, the Panel accepts that there was no intention on the part of Credit Suisse, Freshfields or HFW to mislead the Panel.

They did not intend to mislead (or – I suppose- the Panel did not feel the need to try and prove it) but they did do it.   It is one of a series of reminders that more needs to be done by lawyers to think about and properly instantiate the public interest obligations contained in their codes of conduct.

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Trust the Judges?

There’s an interesting story in today’s Independent (h/t Dana Denis Smith) which if you look closely at the graph shows trust in judges rising from a paltry 61% in 2008 to 70 in 2015.  Is the judiciary doing what few other occupations have managed, increasing trust in recent years? Perhaps, although in 2006 trust in judges ‘to tell the truth’ was at 77%. That’s still nearly a quarter who don’t trust judges to tell the truth, but let that pass for now. Interestingly, judges took a big hit to their trust rating in in the following two years: 2007 and 2008.  They’ve been gently clawing back lost ground since then. It would be interesting to speculate on the causes in 2007 and 2008, but as I struggle to remember last week, let alone eight years ago, I will resist.  It is, however, interesting to note from the graph that the occupations that had the most similarly precipitous fall during that period were mid and up-market journalists.

In a slightly different context it is interesting also to note the Policy Exchange’s project on judicial power.  Their laudable project aims to focus on, “the proper scope of the judicial power within the constitution”.  It’s a shame that, “Doubts about the wisdom of an expansive, adventurous understanding of judicial power have been, are and should be shared by people and groups who otherwise have very different political commitments” appear to have been pre-judged.  These are doubts I would be perfectly willing – already partly am – persuaded on.  Yet. in a moment of hyperbolic nonesense they claim:

the rise in judicial power within the United Kingdom has taken place without sustained public debate.

To which I can only gasp, Have you not been reading the papers for the last ten years? Perhaps their answer is, we have been reading the papers, but we do not trust them.

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Mind the Gap: Insurers Ethics Should be Under Scrutiny?

Kerry Underwood has been writing an interesting set of posts about the questionable practices used by insurers in dealing with claims.  Today’s post caught my eye.  It reminded me of Stephen Mayson’s concerns  about the regulatory gap, where certain types of providers of non-reserved legal services have the benefit of lighter regulation to the potential detriment of consumers.  What Kerry’s post reminds us is that those not actually providing legal services (in the conventional sense) may also take advantage of a regulatory gap.  Kerry paints a picture of insurers trying to bully clients into settlement in ways which a solicitor would be prohibited from doing.  The insurer is not providing legal services to anyone other than itself, and yet the potential claimant is the one who (might be) prejudiced, confused or frightened by (arguably) dubious tactics.

The regulatory framework permits this uneven regulation.  It may then inculcate in the professions a sense of grievance, damaging their commitment to professionalism. The chances of a thoroughgoing review of the definition of reserved legal services seems remote – no matter how rational the case for this appears to be, so the chances of a broader review which encompasses to totality of behaviours in the system must be remoter still. Insurers play the politics better and yet may be less ethical in their practices than the claimant lawyers they so publicly criticise.  Of course, Kerry’s views may be only part of the picture.  We should watch with interest to see how insurers respond to these complaints, if indeed they see fit to respond at all.  It would be interesting also to know of this is something that the SRA, for example, take up with the insurance industries’ regulators and interest groups.  It would also be interesting to know if any of the letters emanating from insurance companies are produced, approved or supervised by in-house legal staff who are admitted.  There professional conduct sanctions could, in certain circumstances,  bite.

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Out of the Shadows: Are Institutional Clients Influencing Lawyers to the Detriment of Others?

Steven Vaughan and Claire Coe have conducted a study of senior commercial lawyers for – but independent of – the SRA: Independence, Representation and Risk: An Empirical Exploration of the Management of Client Relationships by Large Law Firms.*   The study concentrated on ‘high impact’ [i.e. high risk in SRA terms] commercial firms working.  The essential concern addressed by the research was whether institutional clients were exercising too much influence over the firms they instructed, to the detriment of the public interest and/or the interests of other clients.

The central finding was that all respondents, “discussed a shift in the balance of power from law firms to clients… [with] major corporates and financial institutions seek[ing] to impose their own terms of engagement on law firms.”  Most interviewees it seemed felt forced to accept terms of engagement dictated inflexibly by the client although some reported routinely and successfully pushing back on unacceptable terms.

It is customary to see growing client power as redressing an historical imbalance that favoured complacent firms in their dash for cash at the expense of client interests.   After all, a key plank of the case for innovation is that client demands have changed and firms must adapt.  Whilst generally the resurgent client is seen as a positive, this report suggests some negatives.  Similarly, one might be tempted, unwisely if taken too far, to discount general grumbles that client procurement practices discourage lawyers from viewing themselves as professionals.  Allied with the concern that lawyers are increasingly thinking of themselves as mere ‘service providers’, the report raises more specific concerns which it seems to me do require careful thought and a considered response.

The first of these is the familiar concern that institutional clients deliberately seek to conflict certain large firms out of litigating against them, whether that conflicting out is merited or not.  Partly this seems to be institutional clients, not entirely unreasonably, taking a broader view of conflicts of interest than law firms would like to take.  There may also be a degree of seeking to transport tougher US rules to UK firms.  Partly though there is the often complained of tactical implication of firms deliberately:  as the report states.

a minority of our interviewees [said] that law firms may be appointed to those panels, and made to sign ‘no sue’ clauses, where the client has little or no intention of giving that firm work.

It would be interesting, as the report notes, to look in a more rounded fashion at the practice and institutional client views on this approach.  It is also worth contrasting this view of the conflict of interest rules with the view that was offered by City lawyers at the time the conflict rules were reconsidered. The tenor of their response at the time was that clients were relaxed about more liberal rules, whereas the pressure this report identifies suggests rather the reverse.

A more worrying problem is that (some) clients appear to be seeking terms which (some) firms accept that may affect duties it owes to other or future clients.  This raises two interesting questions:

  • should firms be able to enter into such terms at all (presumably the answer may be yes for limitations on future clients but no for current clients); and,
  • should those terms be disclosed to future clients so they can decide whether to instruct lawyers who’s hands are somewhat tied by other (more powerful) clients.

The most interesting and concerning example of institutional pressure came not from clients but from “shadow clients”. This is how Vaughan and Coe define shadow clients:

third-party payers seeking in some contexts to influence the behaviour of advisers to other parties on a transaction. … [That have] the power …to choose which law firms act for other parties on their deals, and to dictate their roles.

They describe such clients as potentially having:

 significant influence over its appointment, remuneration, and potentially the scope of its work, but without directly instructing it.

And their respondents suggest this is becoming increasingly common practice:

 …Critically, we were told that it is becoming increasingly common practice for the sponsor on a private equity transaction to appoint the law firm that will advise the lender before that lender bank has been chosen. As a consequence, the scope of that law firm’s role and the terms of its engagement are agreed with the sponsor, instead of with the bank that will ultimately be the law firm’s client.

Whilst we might expect that banks could look after themselves in this kind of transaction, some of the respondents disagreed:

Basically the lender and the sponsor clients are not actually getting the best advice because one or the other of the lawyers is concerned about a view that the sponsor or lender client will have of them in taking particular positions on points. So, actually on both sides of the table I’ve had sponsor clients saying to me and I’ve had lender clients saying into me, ‘Hang on, what on earth is this lawyer doing? These are points that I do not want to give’. But it’s because – cahoots is an emotive word – but it’s almost like they’re in cahoots because they’re frightened to damage their reputation with someone who might be on the other side of the table who they perceive is perhaps a better work bringer. So, actually their advice is being coloured. In that particular situation I mentioned it was the lender who in their view was being prejudiced because the sponsor was calling the shots.

Another said:

I think there is a genuine potential, I only say a potential, for ethical conflict if your fees are being paid by a third party.

Concerningly, a third puts the blame on the banks.  One can sympathise with the sentiment,  but it is the lawyer who has the professional obligation not to act in a conflict situation:

I think its unfortunate banks have allowed themselves to get into a situation where this happened. …Their argument to the banks is, if they’re a strong borrower they’ll say, ‘If you want to use lawyers, if you expect us to pay for them, then we want to have a say. We want to choose them or have a strong say in who you choose, because it’s our problem; it’s our fees.’ It can give rise to challenging pressures for an individual partner or a law firm’s deal flow and income to be determined by whether the people on the other side of the table, whose interests aren’t aligned with their own client’s, like them. There’s always a suspicion or the fear that some lawyers in the market will gain market share by not really doing the best job for their client but by being over-accommodating to the borrower’s side.

Equally, “Many of the partners that we spoke to were at pains to point out that the phenomena of third-party payers, and by extension shadow clients, was not a new one, and that firms behave reputably in the vast majority of circumstances.”  Whether such firms are really well placed to judge how or whether their advice is influenced is more moot.  There are a raft of studies pointing to unconscious bias effects forged by client loyalties which suggest there may be a problem without the lawyers being aware of it.  That respondents referred to the growing power of shadow clients and repeatedly worried about ‘the next guy’ being less ethical than them should give everyone engaged in the practice significant pause for thought.  Any good student of ethics will tell you that situations where there is opportunity, even more so pressure – overt or subtly – to behave inappropriately is likely to lead to ethical problems.  The report provides only limited comfort on this, if it provides any at all:

While we were not given any specific examples by our interviewees of this practice resulting in tangible violations of the Handbook, many of our interviewees were concerned by the potential for lawyers appointed by third parties to possibly act, in ways subtle and refined, in the interests of those third parties over the interests of their clients. We would agree, and this point was also raised (unprompted) by one of the in-house lawyers to whom we presented our interim findings.

It is possible that these views are the lawyers way of pushing back at a competition problem: we don’t like that clients (or sponsors) are so strong and this gives us a way of hitting back.  Yet, the report is littered with anxiety about the problem and in fact the clients are not doing anything improper but lawyers acting in stituaions of actual or potential conflict are.  One final quote on the practice illustrates the concerns:

[It] creates some very odd dynamics because [the shadow client is] never going to choose a law firm that’s going to give them a bloody nose. So who really is your client? And anecdotally, there are lots of stories where the banks feel pretty hacked off that the people that are meant to be batting for them seem to be conceding much more to the sponsor than you would expect. And I don’t think that’s good for the profession.

The researchers’ view is clear, “we would suggest that these arrangements do appear to put the independence of lawyers at risk and therefore raise challenges for the legal profession and the SRA.”

The report considers a second set of potential problems including the attempts of clients and firms to ‘add value’ to their mutual relationships through secondments and the like.  As the report puts it there are:

potential for breaches of confidentiality to arise from client terms –  via inbound secondments, IT and data protection audits, most favoured nation clauses etc – struck us as being high, but our interviewees seemed confident that this risk was being managed appropriately.

Similarly, there is a question as to how firms are managing the risks associated with increasingly strong clients.  The report finds a diversity of approach which suggests concerns:

Firms have responded to changes in their engagement in different ways. Some use Risk Committees, Opinion Committees and/or Pricing Committees. In some firms, partners appear to have almost total discretion as to the terms they sign up to. Other firms have formal processes in place for the review and sign off of these terms (even if, as we were told, those processes are not always followed by individual partners).

In this context, the research notes work that Steven Vaughan and I did which also found varied and sometimes ad hoc approaches to risk management by in-house lawyers.  Similarly echoing work we did there and work I have done on commercial lawyers there is an apparently poor grasp of core professional principles by senior practitioners.  If one is concerned about shadow clients one would also expect lawyers to have a good grasp of the key principles, in particular, independence. Yet:

Our interviewees’ understanding of the concept of independence was generally poor. Some respondents suggested that they are not independent, nor do clients expect them to be so. This may be because lawyer independence is a complex and nuanced concept, or may be for other reasons. It is our view that the current definition of independence in the SRA Handbook does not necessarily account for many of the complexities and nuances of independence in today’s large legal practices.

Furthermore the researchers had doubts about the extent to which training within law firms adequately reflected on professional obligations (something my own work also suggests) and about the way COLPs now influence professional cultures.  In some firms there is the suggestion that the role of the COLP in some firms is, “as the ‘holder’ of professional values for the firm” and that this encourages (unintentionally), “individual lawyers to become less aware of, and less interested in, their own professionalism, professional identity and professional obligations.” If the researchers are right, law firms – especially those with a less than firm grip on the terms that their partners are agreeing to – may be putting themselves at significant risk.


* I was part of the external reference group, which contained an interesting mixture of SRA staff, City practitioners with compliance and risk backgrounds, and academics.

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