Hello and welcome to the Fides Weekly Update. Take a look at this week’s key trends, moves and developments in legal and compliance.
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1) SFO TO CONSIDER REVISED FUNDING MODEL
Legal Business provided further insight this week on the Serious Fraud Office’s (SFO) investigation into the forex scandal. After having submitted a Freedom of Information request, the legal press site revealed the SFO totalled £2.1m spend whilst investigating the market rigging.
The FX probe was dropped in March this year as the fraud agency claimed “insufficient evidence” as to why they were unable to demonstrate criminal activity, leading to zero charges being made against banks or individuals.
It seems the SFO’s tactic of employing a blockbuster funding model, whereby supplementary funding for certain investigations is granted by the treasury, has been called into question. A report from HM Crown Prosecution Service Inspectorate has argued that relocating resources away from such high-profile cases could be “more effective and provide better value for money”. Although this funding has allowed the SFO to take on cases that would normally be too big to pursue, the report insists that more needs to be done to increase transparency and better define the SFO’s approach to their spending. During the forex investigation, the SFO requested an extra £21m in funding to help it keep pursuing complex cases, which equates to 60% of their total budget for major cases.
The failure to make convictions in this case has led to many losing confidence in the SFO’s appetite for large-scale investigations. More recently, the SFO have been working on plans to charge four Deutsche Bank employees and one SocGen trader in relation to the alleged manipulation of Euribor. Perhaps the outcome of this investigation will be the deciding factor in proving whether or not the organisation is in fact ‘fit for purpose’.
Supplying sufficient budget to equip the SFO with enough resource to tackle large cases such as market rigging will always be a disputable topic. The improvements made to the organisational culture and risk assessment at the SFO have been promising, but moving away from the blockbuster funding model may prove challenging as financial flexibility is necessary due to the lengthy and costly nature of their investigations.
2) US ASSOCIATE PAY
Following our analysis last week of associate salary increases in the Magic Circle, the war for top legal talent has intensified across the Atlantic following Monday’s announcement that Cravath, Swaine & Moore are raising base salaries for associates in New York and London to $180,000 (£123,600) for first-year lawyers.
In the first salary hike for junior lawyers since January 2007, before the financial crisis, the raise represents a $20,000 (£14,000) increase for first-year associates, which rises to $315,000 (£216,000) for eighth-year associates. This is up $35,000 (£25,000) on current levels at the firm, and is exclusive of any bonuses.
Associate Salary Scale – Cravath, Swaine & Moore
1st year – $180,000 ($160,000 + $20,000)
2nd year – $190,000 ($170,000 + $20,000)
3rd year – $210,000 ($185,000 +$25,000)
4th year – $235,000 ($210,000 +$25,000)
5th year – $260,000 ($230,000 + $30,000)
6th year – $280,000 ($250,000 + $30,000)
7th year – $300,000 ($265,000 + $35,000)
8th year – $315,000 ($280,000 + $35,000)
Response from the market has been sharp, with other predominant US law firms quick to confirm that they will match Cravath’s pay hike, with lawyers in London also set to benefit from the increase.
Milbank, Tweed, Hadley & McCloy, Paul Weiss Rifkind Wharton & Garrison, Weil Gotshal & Manges and Cahill Gordon & Reindel were among the first to agree to match Cravath’s pay levels, with Paul Weiss and Cahill both extending the rises to their London offices.
Wednesday saw the announcement that associates at Cooley, Debevoise & Plimpton, Simpson Thacher & Bartlett, and Skadden Arps Slate Meagher & Flom, will also receive pay increases on the scale adopted by Cravath.
Kirkland & Ellis have also agreed to match Cravath’s new pay scale in all of its offices up to those that qualified in 2010, who will receive $280,000.
Meanwhile, Latham & Watkins have also raised base pay for associates in a number of its international offices – including London.
According to The American Lawyer, Sullivan & Cromwell, Quinn Emanuel Urquhart Oliver & Hedges and Vinson & Elkins have all also upped their associate pay, although it is not yet clear whether these pay increases at these firms will apply to their offices outside of the US.
Cravath’s move to increase associate base salary in New York has also prompted UK firms in the region to review their associate compensation. Yesterday, Freshfields announced that first-year and second year associates in its New York and Washington offices will receive $180,000 a year, matching the increase by Cravath, whilst those who joined in 2007 or later will receive $325,000.
Clifford Chance has also announced this morning that US associates will also now receive $180,000, rising to $315,000 (£218,000) for those who qualified in 2008.
It is not surprising that leading law firms in New York and London have rushed to adopt Cravath’s new pay scale, which signals increased competition for a shrinking pool of top law graduates.
According to a report earlier this year in the American Bar Association, law schools graduated 39,984 students in 2015, down nine percent from the previous year. Beyond this, much of the drop-off has been among students with high GPAs and LSAT scores so firms have to be more aggressive to attract the best talent that is available.
For those in the AM 100 where it will not be feasible to adopt Cravath’s associate pay scale, it will be interesting to see how firms choose to implement the $180,000 starting salary across different ranks or office locations – as already witnessed at Kirkland and Latham’s – in efforts to remain competitive.
Cravath’s short partnership track of 8PQE also brings into question whether other law firms will do things differently on base compensation for their very senior associates and counsel. For the firms that only selectively introduce this model, salary compression and smaller pay increases for very senior associates is likely to be rife, erode associate morale and make it harder to retain lawyers at this level who are increasingly leaving for smaller firms or government and in-house opportunities.
In a broader sense, the raise in associate pay to $180,000 undercuts market trends to reduce the pricing of legal services and raises the question of how Cravath and others will meet be able to meet the needs of in-house counsel with limited budgets whilst their clients can obtain equal or better legal services at a fraction of the cost.
It also raises the question if such an increase in associate pay is needed to ensure the long-term growth strategy of UK-based international firms in the US.
MOVERS & SHAKERS OF THE WEEK
ISDA appoints new GC
David Geen has stepped down as general counsel for the International Swaps and Derivatives Association (ISDA), and is replaced by acting GC Katherine Tew Darras
Baker & McKenzie appoints new Chairman of the Firm
London managing partner Paul Rawlinson has been announced as the firm’s next global chair and is due to take over the role in October this year
WFW shifts chair to NY
Watson Farley & Williams moves chair Frank Dunne from its London to New York office and hires Mischon de Reya’s New York litigation head Joshua Sohn in an attempt to boost capability in New York
EY expands competition team
Addleshaw Goddard’s competition head Phil McDonnell has joined EY as an executive director and head of competition law for the UK and Ireland
Eversheds adds to London financial services practice
Clifford Chance corporate insurance partner Hugo Laing has moved to Eversheds’ London office in their financial services group
Dentons launches Milan competition offering
Dentons has hired Michele Carpagnano from Gianni, Origoni, Grippo, Cappelli & Partners to launch a competition and antitrust practice in the Milan office
Osborne Clarke hires real estate duo
Real estate partners Jo Footitt and Louise Cartwright bot exit Irwin Mitchell to become partners at Osborne Clarke
Lathams adds Dechert finance expert to partnership
Jeremy Trinder has joined Latham & Watkins’ City finance practice from Dechert
White & Case makes finance push with Freshfields hire
Real estate finance partner Jeffrey Rubinoff has left Freshfields Bruckhaus Deringer to join White & Case
PwC Legal strengthen Australian offering
Four new partners have been added to PwC Legal’s partnership in Australia. Partners include Baker & McKenzie’s Ashley Poke and Ashurst’s Tiffany Barton into the corporate practice; Gilbert + Tolbin’s Cameron Whitfield as the head of PwC’s Australian digital and technology law practice, and Corrs Chambers Westgarth private equity partner James Delesclefs.