The calls started flooding into JPMorgan Chase last month.
As settlement talks with the federal government over the bank's mortgage business heated up, lawyers began aggressively seeking a lucrative piece of work. The lawyers wanted the plum assignment of serving as monitor for JPMorgan's mortgage operations -- a corporate baby-sitting role that is typically part of a settlement.
JPMorgan's announcement on Friday that it had set aside $9.2 billion to cover its mounting legal expenses -- leading it to report its first quarterly loss under Jamie Dimon -- underscored how the numerous regulatory woes at the nation's largest bank are proving to be a boon for the country's most sophisticated law firms.
Mr. Dimon, JPMorgan's chief executive, described the legal expenses on Friday as "painful." But that pain is profit for the bank's outside law firms, which include some of the cream of the Wall Street bar: Sullivan & Cromwell; Paul, Weiss, Rifkind, Wharton & Garrison; and WilmerHale.
Even as defense lawyers publicly complain that government regulators are being too aggressive, they privately celebrate the windfall. Law firms in New York and Washington are collectively earning many hundreds of millions of dollars representing JPMorgan in cases ranging from weak controls against money laundering to commodities trading, according to interviews with senior partners at several of top firms.
Mr. Dimon warned investors that even with a huge legal bill for the most recent quarter, the costs could "continue to be volatile over the next several quarters."
Bracing for additional legal costs, JPMorgan has set aside a $23 billion cushion for litigation reserves, a figure that the bank disclosed for the first time on Friday. A large portion of that will most likely go toward penalties levied by the government, as well as to pay advisers like accounting and consulting firms.
Other big banks have been plagued by huge legal bills in recent years. Since the financial crisis, Bank of America has doled out more than $20 billion in legal costs, according to government filings.
All the legal work resulting from government scrutiny of big banks has propped up earnings at the country's top-tier law firms, which have struggled with soft performance since the financial crisis. Traditional profit centers like mergers and acquisitions and bankruptcy have been especially uneven.
"Overall demand for legal services has been essentially flat for the last three and a half years leading to meager revenue growth," said Dan DiPietro, chairman of the law firm group at Citi Private Bank. "This has been one of the few bright spots in an otherwise tepid environment."
The litigation boom is being driven, in part, by a stepped-up effort from government authorities to increase the oversight of Wall Street after they were criticized for not doing enough in the years before the financial crisis.
In a speech earlier this month, Andrew J. Ceresney, the new co-head of enforcement at the Securities and Exchange Commission, trumpeted what he saw as his agency's more combative approach. "When I first started, I had said that one of my goals was to help bring the swagger back to the enforcement division," he said. "And I feel like we have succeeded in doing that."
Adding to the headaches for banks -- and the opportunities for lawyers -- are the swelling number of regulatory agencies. The newly minted Consumer Financial Protection Bureau, for example, has taken aim at banks' credit card practices. In New York, the state's banking authority, the Department of Financial Services, has gone after banks for funneling billions of dollars on behalf of nations like Iran.
Corporate law firms have long positioned their practices to capitalize on the business trends of the day, from the boom in bankruptcies in the wake of Enron and WorldCom to the leveraged buyout mania of the last decade. The recent insider trading investigations have generated hours upon hours of billable work. But for the most part, those cases are not especially lucrative as they are leanly staffed with only a small team of lawyers.
Cases involving money laundering or mortgage-backed securities, however, require large teams of lawyers to review millions of pages of documents and to interview armies of bank executives. These sprawling investigations have forced Wall Street banks to divert billions of dollars in profit from shareholders into the coffers of corporate law firms.
Other big banks have come under fire. In a civil case, federal prosecutors in Manhattan accused Bank of America last October of carrying out a scheme through its Countrywide Financial unit that supposedly defrauded government-backed mortgage agencies by churning out loans without adequate controls.
But JPMorgan alone has become a full-employment act for corporate lawyers as the bank, once a favorite in Washington, faces scrutiny from at least seven federal agencies, several state regulators and two foreign countries. On Friday, Marianne Lake, JPMorgan's chief financial officer, cautioned that legal expenses exceeded what "we could have anticipated even a short while ago."
The last time JPMorgan reported a loss for the quarter was also a result of legal expenses -- in 2004, when settlements related to their business dealings with Enron and WorldCom weighed on the bank's results.
This time around, the bank has retained several powerhouse firms to represent it. Lawyers from Sullivan & Cromwell, for example, have snagged coveted work advising JPMorgan on an investigation by the Commodity Futures Trading Commission, which is pushing the bank to admit wrongdoing connected to its trading loss in London, according to people briefed on the matter.
Wachtell, Lipton, Rosen & Katz is helping JPMorgan navigate an investigation by prosecutors and the F.B.I. in Manhattan into whether the bank failed to alert authorities to suspicions about Bernard L. Madoff's Ponzi scheme.
The bank tapped Paul, Weiss, Rifkind, Wharton & Garrison to handle scrutiny from the S.E.C. and the Justice Department into the bank's decision to hire the children of well-connected Chinese officials -- an issue at the center of a wide-ranging bribery investigation. And WilmerHale was hired related to a federal inquiry of the bank's energy trading business.
Beyond the government investigations, lawyers are benefiting from a desire within JPMorgan to bolster its internal controls. To do that, the bank has gone on a hiring spree, scooping up some experts in money laundering from the Manhattan district attorney's office, for example, as the bank increases its staff handling legal and regulatory issues.
Outside lawyers are jockeying for work related to an anticipated settlement between the bank and government authorities over its sale mortgage securities.
During those negotiations, JPMorgan has offered to pay a fine of roughly $7 billion and provide $4 billion in relief for struggling homeowners, people briefed on the matter said.
The settlement, which is still in flux, could result in the assignment of a monitor to oversee JPMorgan's mortgage business. The Justice Department often installs monitors inside companies as part of their settlements.
Most recently, as part of its guilty plea last December, BP agreed to pay $4.5 billion in criminal fines and penalties, and said it would retain a risk management monitor and an ethics monitor.
Dennis Kelleher, the head of Better Markets, an advocacy group focused on financial industry reform, was a partner earlier in his career at the large law firm Skadden, Arps, Slate, Meagher & Flom. He blames the bank for its prodigious legal bills.
"This massive morass that JPMorgan and Jamie Dimon find themselves in is of their making," Mr. Kelleher said. "Improve your behavior and you won't need to hire so many lawyers."
By Jessica Silver-Greenberg and Peter Lattman
Source: The New York Times
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