Biglaw

Biglaw Firm Hit With $500 Million Malpractice Suit

Did this Biglaw firm botch the statute of limitations?

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This week, the Biglaw firm of Reed Smith was slapped with a $500 million malpractice lawsuit. The claim was filed by two defunct Bear Stearns investment feeder funds that Reed Smith represented in RMBS-related litigation. The lawsuit claims that the Biglaw firm failed to bring a case against the rating agencies —  Standard & Poors, Moody’s, and Fitch Ratings —  in a timely manner, resulting in those claims being dismissed.

“Reed Smith’s negligent failure to understand New York’s statute of limitations cost the Bear Stearns Funds what Reed Smith identified as a billion-dollar claim against various rating agencies,” the complaint said.

The liquidators of the feeder funds were represented by Reed Smith in a case against JPMorgan Chase (which acquired Bear Stearns), Deloitte & Touche, and individual investment managers at Bear Stearns alleging they were aware of the risks associates with the RMBS purchases. That case settled in 2013. Also in 2013, Reed Smith filed a lawsuit against the rating agencies on behalf of the feeder funds. Though the securities in question were purchased by a Bear Stearns master fund (not directly by the feeder funds) in 2006 and 2007, with the relevant statute of limitations being six years, Reed Smith argued the time to file suit should be extended under a “continuing harm” doctrine. That argument was ultimately unsuccessful, and the case was dismissed in 2015.

As reported by Law.com, the complaint alleges Reed Smith conducted an analysis of a potential claim against the rating agencies in 2011, before the SOL would have run, and never informed the client:

The feeder funds’ malpractice suit alleges that Reed Smith had conducted an early analysis of a possible rating agency suit in 2011—at a point when the relevant six-year statute of limitations would not yet have run out.

The analysis ultimately concluded that the feeder funds would have to purchase claims from the master funds in order to pursue litigation against the rating agencies, and noted questions about the statute of limitations. But Reed Smith failed to inform its feeder fund clients about that analysis until 2013. By that point, the complaint said, the rating agency case was “doomed” before it began.

In a statement by their attorney, Kevin Rosen of Gibson Dunn & Crutcher, Reed Smith denied any wrongdoing, saying the client instructed them not to pursue the case against the rating agencies until the settlement in the related case was approved:

“Reed Smith obtained an extraordinary litigation victory for these Cayman hedge funds in complex litigation against their investment managers. Now the hedge funds want even more, claiming Reed Smith should have concurrently sued others for the same damages,” Rosen said. “But the hedge funds couldn’t bring those claims at that time and told Reed Smith not to do so. Reed Smith always acted properly; the hedge fund claims are meritless and riddled with false allegations; and we look forward to establishing all of that in court.”

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While a botched statute of limitations reads like textbook malpractice, there seems to be more here than meets the eye. It will be fascinating to follow the proceedings.

headshotKathryn Rubino is a Senior Editor at Above the Law, and host of The Jabot podcast. AtL tipsters are the best, so please connect with her. Feel free to email her with any tips, questions, or comments and follow her on Twitter (@Kathryn1).

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