CDO Suit Between Citibank And Morgan Stanley Highlights Attorney Conflicts

citibank sign tbi

A suit between Citibank and Morgan Stanley provides an example of firm client conflict concerns and raises a question of how those conflicts will play out in the financial crisis.  

Citibank filed a $245 million lawsuit against Morgan Stanley on Friday, claiming Morgan Stanley breached a credit default swap agreement it entered into with Citi.

NYT DealBook:  Citibank bought a credit default swap from Morgan Stanley & Company International in 2006 on a $366 million revolving credit facility it provided to an issuer of collateralized debt obligations, according to the complaint filed in Federal District Court in Manhattan.

The swap obliged Morgan Stanley to pay Citibank the money as a result of a payment default on the credit facility to the collateralized debt obligation, known as Capmark VI, it said in the complaint.

Liquidating the debt obligation’s collateral did not cover the entire amount, and Citibank said it exercised its right under the credit default swaps to have Morgan Stanley make up for the shortfall, but it refused, according to the complaint.Citibank paid Morgan Stanley about $750,000 for the swaps, according to the complaint. 

Citi is represented by former Fried Frank litigator Gregory Joseph, who now has his own firm. points out that Citi is usually represented by Paul, Weiss, but that they have a policy of not suing other banks.  The site also notes that it is somewhat surprising that Quinn Emanuel is representing Morgan Stanley, given that Quinn often sued financial institutions, though they have an ongoing relationship with Morgan Stanley management.

Ethics rules require attorneys to turn down work that would harm the interests of their clients, and many firms have internal policies that require them to turn away cases if it will harm business interests; big firms may not want to sue a large bank, even if they do not have any actual conflicts because they (or, more specifically, their corporate departments) may want to represent that firm in the future.  

That, of course, is why firms like Quinn and Susman Godfrey often receive referrals to sue the big banks; they have little interest in long-term relationships with the banks because they represent plaintiffs as much as defendants and big money cases involve suing big money institutions.  

But as the economy recovers and the resulting disputes are litigated – and big firms seek to recover from lagging financials – it will be interesting to see if big firms are a little more aggressive in accepting these cases despite longer-term business concerns.  

In the meantime, though, at least one smaller firm is benefitting – Joseph’s firm is also representing Citi in its dispute with Wells Fargo over the Wachovia purchase.

Citi v Morgan Complaint


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