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May 29, 2009 5:58 PM

Do Bailout Firms Have a Conflict of Interest?

Posted by Brian Baxter

The Washington Independent reports that several firms, including Simpson Thacher & Bartlett, appear to have conflicts of interest by doing bailout work and representing banking clients despite signing Treasury Department contracts designed to prevent conflicts.

The Am Law Daily made some calls of its own in the past week looking into another firm--Squire, Sanders & Dempsey--and the conflicts question turned out to be one not easily answered.

Simpson and Squire Sanders are two of several firms that were awarded bailout contracts with Treasury last fall. At the time, ethics experts contacted by The Am Law Daily called the conflicts provisions in those contracts unprecedented.

The Independent reports that an analysis of those contracts "reveals an inconsistent set of rules applied to the types of private deals that contractors can make while serving as agents of the U.S. government."

The Independent writes that Simpson financial institutions practice chair Lee Meyerson, named one of The American Lawyer's Dealmakers of the Year for his TARP work, "continued to advise private-equity clients on how to snap up failing banks while he worked on the bailout."

When three private equity firms took over Florida's BankUnited last week in a deal that cost the FDIC $4.9 billion after the bank collapsed, the Independent notes that it was Meyerson who represented the PE buyers.

Simpson did not respond to the Independent's requests for comment. When The Am Law Daily reported on Simpson's Treasury contract last fall, firm chairman Richard Beattie was adamant that the government had no preconditions on dropping clients to take bailout contracts.

"They did not say that," Beattie said. "It's ridiculous. We represent JPMorgan Chase and would not give up a client like that."

Some told the Independent that the two positions create the possibility for impropriety.

"These firms are making up the rules [of the bailout] and advising private clients about the rules," Yale Law School professor and banking specialist Jonathan Macey told the Independent. "The problem is, No. 1, this means we lose the appearance of fairness. And, No. 2, there's a very strong inclination for the people making up the rules to be sympathetic to their own clients as opposed to other people's clients when they're writing the rules."

As noted by the Independent, some firms, such as Davis Polk & Wardwell, have turned down bailout work because of potential conflicts of interest.

Other firms have not been as cautious.

The National Law Journal reported two weeks ago that Squire Sanders was representing the Committee of Affected Chrysler Dealers, a coalition of dealerships scheduled to be closed if a bankruptcy court approved the automaker's proposed section 363 sale.

Squire Sanders is also one of several firms that have TARP contracts with Treasury to advise on the acquisition of troubled assets from banks and other financial institutions. At first glance, it appears that the firm's role in the bankruptcy proceedings, effectively challenging the automaker's sale, is adverse to Treasury, which supports Chrysler's sale.

But a legal ethics expert contacted by The Am Law Daily says that despite the strict conflicts rules in the Treasury contracts, the sheer size of the U.S. government likely gives Squire Sanders some leeway in taking on both engagements.

"If the United States were a private company, and the firm was opposing the [U.S.] in court while doing transactional work for the U.S. as a private company, then it would surely be a conflict," says New York University School of Law professor Stephen Gillers. "But when the client is something as huge as the U.S. with tentacles in all kinds of matters, the courts tend not to look at the government as the common client."

Gillers says that Treasury would be considered a client of Squire Sanders on the bank workouts, and that the Justice Department would be the opposing party representing the U.S. in Chrysler's Chapter 11 proceedings. "The courts tend to look at the branch of government that you're working for and against, in order to determine whether there is a current client conflict," he says.

The Treasury is being represented in Chrysler's Chapter 11 case by assistant U.S. attorneys Jeannette Vargas and Tara La Morte from the U.S. attorney's office in Manhattan and Cadwalader, Wickersham & Taft financial restructuring department cochair John Rapisardi. (Rapisardi declined to comment.)

A Treasury official who requested and received anonymity for permission to speak freely, says that the government's reading of Squire Sanders's TARP contract doesn't lead it to believe that the firm is in conflict.

"As long as Squire Sanders is not adverse to Treasury, as opposed to adverse to Chrysler, the representation doesn't create a conflict," says the official, adding that while Treasury supports the automaker's sale, it's interests are not perfectly aligned with Chrysler's. "So there is nothing prohibiting their actions here."

A lawyer whose client supports the Chrysler sale, and is thus adverse to Squire Sanders in the Chapter 11 case, says the firm can probably avoid the issue of a legal conflict because it's not representing Treasury in the bankruptcy. But the lawyer, who requested anonymity when discussing a client matter, does see the potential for a business conflict.

"Do you really want to do something that's going to piss off another client, even though there's not a legal conflict that says you can't do it?" the lawyer explains. "This is sort of surprising, because you might risk losing that client or having them pull their business. I would imagine that this is so obvious that they would have asked Treasury whether they cared. That's something we do [with other clients] all the time."

The Treasury official contacted for this story did not know whether Squire Sanders had informed the department beforehand of the clients it was taking on in the Chrysler bankruptcy. The official also had no knowledge of any plans to pull the firm's TARP contract, reiterating that Treasury saw the firm as complying with its provisions.

Squire Sanders isn't talking. Calls to bankruptcy and restructuring chair Stephen Lerner, who is representing the Chrysler dealers, and the partner whose name appears on the firm's TARP contract, M&A and corporate finance lawyer Stephen Mahon, were not returned by the time of this story.

For his part, NYU's Gillers sees this as more new legal ground being broken as a result of the global economic crisis.

"If I had to give it a title, this might be what we would call the 'government-client exception to the restrictive concurrent client conflict rule,'" he says half-jokingly. "And it's simply because the government is so large."

A U.S. bankruptcy court in Manhattan is expected to approve Chrysler's sale to Fiat, the UAW, and the U.S. and Canadian governments this Friday.

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