“‘How is it Not a Conflict?’ Debate Surrounds Kirkland’s Billion-Dollar Investment Fund” —

• “When a private equity partner at a prestigious U.K. law firm was asked by one of his clients to invest in the firm’s ‘friends and family’ fund a few years ago, he thought it was a great idea.”
• “So he approached his law firm’s compliance department for permission to invest. But the answer that came back was an unequivocal no. The reason? The firm did not think it was allowed under the Solicitors Regulation Authority’s conflict of interest rules.”
• “But if this particular partner had worked at a Kirkland & Ellis or another major U.S. law firm in London, the answer likely would have been different.”
• “This is because U.S.-based law firms have allowed—and often facilitated—their partners to invest in private equity funds for decades through in-house investment managers. It’s a practice that is little known outside of the private equity industry but is now seen as commonplace at many U.S. law firms.”
• “According to insiders, the world’s biggest law firm by revenue, Kirkland & Ellis, operates the largest and most sophisticated of these funds, a vehicle called Randolph Street Investment Partners that has invested billions of dollars of partner’s personal wealth into private equity. At the same time, the firm’s dominant private equity practice scoops up a huge amount of the industry’s deal flow, with the firm acting for over 800 private equity clients globally.”
• “Alongside Kirkland, a wide range of U.S.-based law firms, including Sidley Austin, Davis Polk & Wardwell, Simpson Thacher & Bartlett, Ropes & Gray and Skadden Arps Slate Meagher & Flom also operate their own highly discreet internal funds allowing their partners to directly invest in private equity funds.”
• “All those involved say there is no conflict of interest in being involved in these schemes and that the firms adhere to conflict rules in every jurisdiction. But none agreed to comment on the record.”
• “Conversely, rival lawyers and academics warn that these sorts of in-house investment vehicles raise serious conflicts of interest concerns, with financial interests potentially compromising lawyers’ independence and their duty to act in clients’ best interests. In the U.K., regulatory specialists also question how these investment vehicles can be reconciled with the Solicitors Regulation Authority’s strict conflict of interests rules.”
• “It’s not hard to imagine situations where conflicts could arise. The clearest risk is a lawyer being on the opposing side of a client or fund they are invested in.”
• “This could be: an M&A lawyer advising a buyer in a deal where the seller is a fund they’re personally invested in; a litigator advising a company that is suing a fund they are invested in; or a restructuring partner advising the creditors against a private equity firm they are invested in during a messy bankruptcy proceeding.”
• “There are also the less obvious everyday pressures: whether a lawyer would push back on a client’s questionable conduct, or even walk away from the relationship entirely, if their own money was riding on that client’s success.”
• “NYU’s Gillers said that firms need to ensure that their independent advice is not affected by having a financial interest in a client. ‘The law firm has to understand that it is not the client because that is really the problem. The law firm as an investor may wish the client to proceed differently in its investment, but it’s the client that gets to make that decision,’ said Gillers.”
• “A partner who is invested in the Kirkland fund said: ‘How do they get away with it? How is it not a conflict?’”
• “Another partner who is invested in a different fund added: ‘Even though I genuinely don’t think it ever influenced anyone. It can just look very fishy.’”
• “Some clients also seem concerned. When Kirkland’s Randolph Street Investment Partners was written about in the press three years ago, some partners at the firm received calls from clients who wanted to know about conflicts arrangements and had little knowledge of the fund, according to one person close to the matter.”
• “The sheer size and scope of both Kirkland’s private equity operations and its investments through Randolph Street mean that some lawyers say it is almost inevitable that they will find themselves on the opposite side of the table to a fund they are invested in at some point. Added to that, it is unclear whether Kirkland has any prohibition on partners acting against funds they are invested in, according to one person with knowledge of the firm.”
• “Kirkland says it works for more than 800 private equity clients around the globe and its private capital practice has the largest deal flow of any law firm. While Randolph Street has such a wide coverage of the private equity sector that one partner characterised it as similar to a tracker fund of the entire private equity industry.”

“BlackRock Subsidiary’s Deal Revealed in ‘Take Care of Maya’ Case” —

• “The litigation finance contract between a BlackRock subsidiary and the family at the center of a Netflix documentary shines a rare light on how much control the lender has over a high-profile case.”
• “Jack and Maya Kowalski won a more than $200 million judgment in a 2023 suit against a Florida hospital. They’re fighting their former lawyers over a $42 million advance on the funds after the award was overturned on appeal.”
• “A redacted version of the credit agreement with HPS Investment Partners shows that the Kowalskis retain control of the suit against Johns Hopkins All Children’s Hospital. But the deal blocks the family from settling the case in a manner that ‘adversely affects the interests of the lenders.’”
• “The agreement offers an inside look at the complex terms in litigation funding deals, which have drawn criticism from major insurers and other companies often on the receiving end of personal injury and consumer lawsuits. It comes as lawmakers in some states and on Capitol Hill are pushing to regulate the litigation finance industry.”
• “‘Predatory litigation financing allows outside funders, including foreign entities, to profit off our legal system, driving up costs and delaying justice,’ Sen. Thom Tillis (R-N.C.) said regarding a tax he tried to impose on the industry last year. State and federal legislation requiring disclosure has also advanced to address the confidentiality of funding agreements.”
• “The HPS deal gives the family ‘sole, final, and unconditional discretion and control as to the appeal, prosecution, remand, retrial, and settlement’ of the case against Johns Hopkins. But it also requires them to keep the lenders informed of all developments in the proceedings, provide drafts of documents before filing, and provide notice of settlement offers and proposals. The agreement states that the Kowlaskis may be considered in default if they settle in a way that harms the lender’s interests or replace attorneys without HPS’ consent.”
• “The details of the funding arrangement came out in the ongoing dispute dispute between the Kowalskis and their former attorneys at Jacksonville, Florida law firm AndersonGlenn LLP. The Kowalskis are trying to stop AndersonGlenn from collecting a nearly $10 million attorneys’ fee from the HPS loan funds.”
• “‘That is an absolute non-recourse loan which was also tax free,’ said Greg Anderson, founder of AndersonGlenn. ‘The only way that the Kowalskis could be jeopardized was if they did absolutely only one thing, that was switch counsel without consulting the insurer, who obviously had an interest, as did the financial group backing the loan.’”
• “It’s difficult to know how unusual the provisions are because of the lack of visibility into these agreements. Some states force disclosure of funding agreements and put limitations on funders influencing the lawsuits they back. Ohio passed a bill earlier this month that requires funders provide funding agreements to the attorney general after cases resolve, while a California measure would prohibit corporate investors from directing or influencing the practice of law. “

“Wall Street law firms ponder fresh era of insider trading risks” —

• “It is the worst-case scenario of every law firm managing partner: the firm’s lawyers trading stocks based on confidential client information, the most severe and fundamental possible breach of professional trust and duty in the profession. “
• “In May, US federal prosecutors charged 30 individuals with securities fraud that delivered tens of millions of dollars in illicit profits for the alleged conspirators. At the centre of the decade-long, wide-ranging ring were several corporate lawyers who worked at elite firms such as Goodwin, Latham & Watkins, Wachtell, Lipton, Sidley Austin and Weil Gotshal.”
• “The charges have shaken some of the biggest institutions in American law, which are now left to wonder how highly paid law firm associates with university degrees from the likes of Yale and Columbia could potentially throw away their own futures as well as blight the gilded reputations of prestigious white-shoe law firms.”
• “The legal establishment has also been left to consider what, if anything, could be done to prevent potential future treachery even while the advisers’ job is to traffic in secrets.”
• “But since then, not only has legal advice on deals undergone a highly lucrative expansion, but the information has been digitised, creating a new era of potential vulnerability to misuse of confidential data.”
• “‘How electronic client data is properly secured and protected and stored has become a huge conundrum for all law firms and lawyers,’ says Devika Kewalramani, a partner at FisherBroyles and an expert in legal ethics. She says that firms have to comply with securities law and standards of professional conduct but how to ensure that is ultimately left to the law firms themselves. ‘There is no universal or uniform standard on how to do all of this that is imposed on law firms,’ she cautions.”
• “While technology has helped to enable the problem of material non-public information being too easily accessed, now entrepreneurs are trying to make software part of the solution. Some specialist companies argue that law firms’ file-sharing systems are too laxly controlled.”
• “Massachusetts-based Congruity 360 argues for what it calls ‘role-based access controls’ where its applications allow sensitive documents to be viewed by only the deal team members who need them. Moreover, Congruity 360 says AI tools now can create intelligent alerts for suspicious activity, such as a paralegal opening a folder that they have not touched in months.”
• “But for all the vetting, training and monitoring of lawyers, experts concede there is no sure-fire way to guarantee that they will not break their bonds with professional obligations. Pay in big corporate law firms rises every year with even junior associates making salaries well into six figures. Even so, some people the FT spoke to have alluded to the pressures of keeping up appearances in socially competitive cities such as New York. As such, the periodic Big Law insider trading matter will probably never fully disappear.”
• ‘Nobody has the silver bullet. This is about risk management. One can do everything, but the pace at which technology is moving is fast,’ says Kewalramani. ‘The fact is it’s very hard to detect this thing until it has happened.’”