Tuesday, February 04, 2014

Russian Oligarchs and Globalized Law Firms....Be Careful Out There.....

Russian oligarchs are popular in the UK, especially London. They buy our football teams, newspapers, and most importantly they use our uber-friendly Commercial Court for their litigation. Barristers' clerks refer to the "Russian premium".

The kick off last year was between Abramovich and Berezosvsky which resulted in a big win for the Chelsea owner and suicide for the loser. More cases are filed for hearing, however.

This is excellent news for the big law firms, but only if you are aware of what your different offices are doing. White & Case have just been conflicted out of a lucrative $2 billion case between Ukranians Pinchuk and Kolomoisky & Bogolyubov. The judgment is here.

It seems White & Case have form here. The parties in the case were investors in metals and ferroalloy companies. David Goldberg, a White & Case partner in London and Moscow, acted for Pinchuk in a dispute against Kolomoisky & Bogolyubov in 2010.

In 2011 one of the companies, Optima, instructed Colin Diamond, a New York partner of White & Case, to act in a corporate restructuring that would result in an American IPO for the company. Diamond ran a conflicts check and discovered Goldberg's activities. Diamond sent his conflict enquiry on a bank holiday weekend and Goldberg didn't remember reading the attached documents. Nevertheless, Goldberg told Diamond the matter had settled and there was no further conflict.

Diamond acted for Optima and during his work White & Case learned much about the company and Kolomoisky & Bogolyubov. He earned over $900,000 in fees on the matter. White & Case worked through to 2013 in this matter.

In 2012 Pinchuk came back to Goldberg to act against Kolomoisky & Bogolyubov again. Goldberg ran no conflict checks or he would have found the restructuring work. When the matter was officially opened a conflict check was ran and the other work became apparent. Goldberg discussed the apparent conflict with White & Case's general counsel who opined there was no conflict. How?

The General Counsel decided there should be ethical screens between Pinchuk's case and the restructuring team. This was monitored by a 30 strong worldwide compliance team. But the claimants weren't told about the screen as they should.

I'm not going into dense detail on this but there ensued proceedings in the London Court of International Arbitration and claims in the US District Court of South Florida. As a result of these Optima's general counsel learned of the case against Kolomoisky & Bogolyubov. He wrote to White & Case about their conflicts and his complaint was dismissed as frivolous.

White & Case eventually withdrew their participation for Pinchuk in the LCIA arbitration but wanted to continue in the Commercial Court case. In all their London, Moscow, New York, Washington DC, and Miami offices had worked on various aspects of the case.

The Commercial Court judge applied the test in Bolkiah v KPMG (1992). In this case KPMG had been the auditors of Brunei Investment Authority during which time they accepted assurances from Prince Jefri about payments out of Brunei. Afterwards KPMG worked for Jefri and learned much about his assets and wealth. When later the Brunei government hired KPMG to investigate payments out of Brunei (which would include to Jefri), KPMG was compelled to create a system of then "Chinese Walls" or ethical screens. The court held that screens needed to be part of the institutional establishment and not created on an ad hoc basis. Here there was too much risk of information leakage.

The Commercial Court followed Bolkiah and said that White & Case owed an unqualified duty to the claimants not to disclose information and the risk of some form disclosure was too great. White & Case's ethical screens were not part of the organisational structure and therefore complete separation had not been achieved.

Pinchuk was mostly excluded from the case and is now left without his lawyers.

What is also of interest is that none of the US Model Rules of Professional Conduct concerning conflicts of interest with past and concurrent clients were considered by the court, at least with respect to the New York lawyers and those of other US White & Case offices. The extent to which these conflicts were waivable is questionable.

Clearly all global law firms are going to have to review their screening and conflicts policies extremely carefully to avoid disasters like this in the future.

Expect an appeal for Russian (and Ukranian) oligarchs love to spend money in the English legal system.


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