Buying Power: How GCs are waking up to law’s diversity problem

By any measure, the events of 2020 have been a remarkable moment in US history: an election that showed political divisions are more entrenched than ever, the type of civil unrest that had not been seen for decades, and in the midst of it all a global pandemic that exposed the fragility and inequality of the economy and prompted the US government to send cheques to 80% of the population. But it was the growing strength of the #MeToo and #BlackLivesMatter movements that really caught the attention.

‘Twenty years from now, sociologists will write books on the factors that coalesced to make this the moment when we finally sat up and acted as a nation’, comments Laura Quatela, senior vice president and chief legal officer of Lenovo. ‘There is a renewed focus on making real and meaningful change, and the kind of momentum that has not been with [US society] since the 1960s.’

As questions over racial equity rise to the top of the corporate agenda, diversity and inclusion (D&I) more broadly is being transformed from a feel-good story to a core part of business strategy. At the same time, says Hannah Gordon, chief administrative officer and general counsel with the San Francisco 49ers, consumers are becoming more willing than ever to sanction businesses that do not meet their expectations of corporate conduct.

‘Of course, 2020 [was] a very difficult year for everyone, but one of the lasting positives is that it sparked awareness of diversity, equity and inclusion inside major corporations. Business is waking up to the fact that we live in a world where a strong commitment to equality and justice is expected, and where the right thing to do ethically is the right thing to do in a business sense. The growing power of consumers to hold business to account is one of the really exciting developments to have taken place over recent months.’

And when it comes to holding the legal market to account, general counsel find themselves in a unique position to shape one of the least diverse professions of all.

The diverse dollar

To put it bluntly, the statistics on diversity within the legal profession are not encouraging. Figures from the American Bar Association show the profession is still as white- and male-dominated as it was ten years ago. Women now represent just 37% of active attorneys in the US, a slight increase from 31% in 2010, while black, indigenous, and other people of colour (BIPOC) lawyers account for just 14% of all active attorneys. In the most underrepresented groups, the number of minority lawyers has actually fallen since 2010.

It has not gone unnoticed by GCs. ‘We still get pitches from all white, male teams’, says Lenovo’s Quatela. ‘We just scratch our heads and think, did anybody look at the roster before they came? I’ve had the same conversation with my colleagues at other big tech companies, and we just don’t understand it.’

This, everyone agrees, is a situation that needs to change. But consensus on how to change it has been harder to come by. In 2019, US Representative Emanuel Cleaver led an open letter seeking clarification on how some of the largest tech businesses in the US were applying diversity policies and practices when hiring outside counsel. This rare moment of public scrutiny for the legal profession was also a timely reminder that those who pay the bills have the power and responsibility to introduce change. And with US corporations spending an estimated $70bn on legal services each year, the potential for their general counsel to drive change is huge.

‘The traditional response among corporate counsel has always been to consider the lack of diversity within law firms as a problem for law firms to address’, says Rishi Varma, general counsel and corporate secretary at Hewlett Packard Enterprise. ‘However, there is a growing sense among GCs that they, as buyers, are just as responsible for the slow pace of change within the profession.’

Jim Chosy, senior executive vice president and general counsel with U.S. Bancorp, has a similar take. ‘In-house legal departments have big role to play in positively influencing diversity with outside counsel. Given our purchasing power, we’re able to drive change and I feel an obligation to do this with our law firms, which we consider an extension of our own in-house function.’

But, as Varma cautions, pushing law firms to hire diverse candidates is only half the battle. Ensuring those candidates are given meaningful roles is just as important. ‘The question of diversity at law firms is a lot more complicated than headline figures. A firm or team can have impressive numbers around diversity – impressive, at least, when compared to other law firms – but that in itself does not mean progress is being made. The analytics I want to see are how many hours those diverse lawyers contributed to a matter. It is also important to understand how origination credits operate at law firms, and how merit and reward is assigned more generally. We need to move the conversation away from a simple focus on diversity toward a more nuanced understanding of how lawyers move through the ranks in their firms, and we need to accept that blaming law firms for a lack of diversity is not the solution – the situation is far more complicated than that.’

Moving the Needle

If the legal industry is going to tackle its historic diversity and inclusion problem, says Lenovo’s Quatela, general counsel and law firms will have to work together. ‘GCs typically have lots of ideas on how to improve things, but they have tight budgets. Law firms also have lots of ideas, but they have profitability targets. The only way to make any of these ideas happen is by finding a place where ideation and economic interests meet.’

One of the more notable attempts to formalise collaboration between law firms and clients has come from the Move the Needle (MTN) fund, an initiative launched by legal D&I innovation incubator Diversity Lab which has since been backed with $5m of funding.

‘There has been both a huge uptick in interest, and an increasingly sophisticated interest in D&I in the legal industry’, says Leila Hock, Diversity Lab’s director of legal. ‘Ten years ago, a law firm or legal department might have thrown money to sponsor a table at an event. Now they recognise that window dressing is not enough. [D&I] is a real issue for the industry and structural and systemic changes that are required. That is a positive development. I finally feel like we are having the conversations with lawyers that many of us in the D&I space have been having among ourselves for years.’

The initiative has brough together law firms, general counsel, and community leaders to road test diversity initiatives and develop new approaches to overcoming underrepresentation which, says Hock, ‘will hopefully serve as models for lasting change.’

For many of MTN’s founding GCs, the biggest draw is its uniquely experimental nature which fosters innovation in a way that many firms or in-house departments cannot do alone, especially when it comes to financing.  ‘One of the big pillars of what we are trying to achieve is the type of collaboration that hasn’t happened before in the legal industry’, says Rishi Varma, a founding member of MTN. ‘By talking and brainstorming as a group, GCs and law firms are finding non-traditional ways of brining diverse lawyers into the profession.’

While the initiative is still in its early days, fellow MTN member Laura Quatela is encouraged by the early results. ‘We are at the point of whittling down the ideas to some initiatives that we as a group want to line up behind. One of the things we’ve talked about doing is a combined law firm and in-house summer programme, where interns or clerks have the opportunity to experience both worlds early in their training so they can start to make the important decisions about where they really want to end up. Other ideas are more experimental. For example, we have been thinking about how legal teams can hire a firm’s top diverse candidates for a set period of time to help them get a solid grasp of how a business operates and what it wants to see from its lawyers. That’s what MTN is all about. It’s a laboratory for experimentation that gives lawyers committed to D&I the chance to do something new.’

For law firms and businesses alike, coming up with new ideas to improve diversity and inclusion is likely to become one of the biggest challenges of the years ahead. ‘What we absolutely don’t want to do is waste the momentum for social change that exists right now’, says Hock. ‘In response to the reawakened racial justice movement we are tracking the public statements made by the large law firms and Fortune 100 companies have made. We are going to track them and check back to see if they’re doing what they said they would do. And we are not the only ones doing this. We need to make sure that companies don’t just put out a statement or put a pride flag on their logo – they need to take action.’


Finnegan – The Legal 500 View

Ask Finnegan, Henderson, Farabow, Garrett & Dunner, LLP’s clients and you’ll hear praises of its professionalism, its technical expertise, and its ethics and integrity. And if you look to The Legal 500 you’ll find that Finnegan has been the strongest performer in its class for over a decade of coverage. This piece is a quick look at a firm that has been one of the most high-quality legal outfits in its field. It’s not one of Manhattan’s white-shoe firms, and it’s certainly no jack of all trades. Finnegan brings a level of expertise and dedication expected of a specialist boutique, but with well over over 300 IP professionals firm-wide, Finnegan is unique. A mega-boutique that is one of the most dominant players in the IP market, Finnegan, Henderson, Farabow, Garrett & Dunner, LLP is among the most consistently excellent firms in any one field of practice.

To illustrate the point, let’s look at a few statistics. With six tier 1 rankings in the US 2020 guide, Finnegan earned more top-tier IP listings than any other US firm. Finnegan’s rankings in those six tables tell us at least three important points about the firm. First, Finnegan has shown itself to be the market’s most complete firm when it comes to registered marks. The firm is ranked among the market leaders in each of the US guide’s four patents tables, as well as in both of the trademarks tables. What’s more, these rankings indicate another kind of breadth of service that is unparalleled in the US IP market. There are some firms that are known far and wide as fierce IP litigators. Other firms—often those with wider strengths in corporate and tech sector-work—have gained a reputation for high-value licensing deals and IP-heavy transactions. Finnegan, however, is the only firm with such compelling highlights in all areas of IP litigation, IP transactions, prosecution, and IP management, both for trademarks and patents.

There’s no question that Finnegan was an impressive performer in the 2020 guide, but the most impressive stat is this: Finnegan has been leading in every one of these six categories for the past five years. In fact, with the exceptions of two small blips (one in 2009 and another in 2015), Finnegan has been a tier 1 performer in every patents and trademarks ranking since the inception of the US guide. To be clear, even those two “blips” amount to dropping to tier 2 in two categories for one year each. Certainly, it’s been a long time at the tops of the tables.

Finnegan is unique in the IP market. But from a rankings perspective, Finnegan is actually the most consistent top-tier firm in any single field of practice across the entire US guide. For each of the past five years, Finnegan has scored six tier 1 rankings in the field of IP. Look to the rankings data for the areas of Finance, Dispute Resolution, M&A/corporate; there is no other firm in any single practice area that has recorded as many top-tier rankings in as many year as Finnegan. From a Legal 500 rankings perspective, and judging firms by a single core expertise, Finnegan is arguably the very best firm in the US market.

Our primary focus at The Legal 500 has always been ranking teams as a whole; but we do of course also put a lot of effort into recognizing the individual lawyers who really stand out. Some Finnegan veterans like Reston-based patent litigator Charles Lipsey have featured on the Leading Lawyers list for about a decade. Among the bearers of the firm’s legacy, Lipsey was first ranked just a couple of years after the US guide was founded, but has been with Finnegan since 1978. Lipsey stands out in particular as being one of the guide’s Hall of Fame Lawyers: a ranking that recognizes an individual’s long-standing and continued position as a leader in their legal field. At the other end of the spectrum, The Legal 500 ranking data also confirms Finnegan’s ability to attract and develop younger talent.

For many years The Legal 500 had identified the best-known and most experienced lawyers in each field of practice. Then in 2017, the US guide introduced a ranking category called Next Generation Partners, designed to shine light on future stars; market leaders of a new generation. In the year that ranking was introduced, Finnegan scored an impressive five Next Generation rankings. No other firm notched more Next Generation Partners in the IP section. Perhaps even more impressive is that of those five lawyers, three went on to become Leading Individuals at the firm. Two years after the establishment of the Next Generation Partners list, The Legal 500 introduced a category called Rising Stars, which aims to highlight promising associates in the market. Again, in its very first year of consideration, Finnegan recorded a name on the Rising Stars list. It might come as no surprise that in sheer numbers, Finnegan has more Leading Lawyers (e.g. Leading Individuals, Next Generation Partners, and Rising Stars) than any other firm in the IP rankings.

Across several points of comparison, Finnegan has been one of the strongest firms in The Legal 500 US over the last decade. The focus here has been on the firm’s top-tier rankings, but it’s also worth noting that Finnegan is featured in The Legal 500 US’ Trade Secrets category, and has also been highlighted in the Copyrights section. Finnegan is perhaps the most complete IP firm in the US, and with a strong roster of Leading Individuals—from stalwart Hall of Famers to Rising Star associates—the firm seems set to maintain its place at the top for years to come.

Falling angels

Seemingly unable to move on from damaging #MeToo allegations; suggestions of an inappropriate drinking culture; an incomplete UK move to Bishopsgate; and a succession of high-profile departures culminating in Skadden’s poaching of Bruce Embley on the eve of Dawson’s appointment; all have contributed to keeping Freshfields in the press for the wrong reasons.

At the same time, and perhaps most important of all, there is the reputational elephant in the room: namely, the cum-ex scandal in Germany. This involves aggressive tax strategies that were championed by a former Freshfields partner so as to take advantage of apparent loopholes in German dividends tax law. (See ‘Der Freshfields-Skandal‘ for detailed analysis.)

What seems striking to outsiders is that other prominent (and respected) law firm tax departments in Germany – notably Linklaters and Hengeler Mueller – said no to their clients on these trades and refused to sign off legal opinion letters. So it seems that what Freshfields was doing was not common market practice (in other words, it cannot be said that every other law firm was doing the same, which is the usual excuse when a tax ploy proves to have been ill-conceived).

The consequences have been enormous. Firstly, it is estimated that cum-ex claims in Germany amount to €11bn (obviously, not all were signed off by Freshfields). Secondly, the Freshfields partner, along with a more junior colleague (also a partner at Freshfields), has since been arrested and faces criminal prosecution. Thirdly, Freshfields has settled a claim from the aggrieved administrators of Maple Bank (a cum-ex client of the firm that reclaimed €380m in tax that was never paid – and which has since gone bust) for €50m.

The two Freshfields partners involved have resigned. But the concern must be that there are potentially other cum-ex clients who might be minded to bring a claim against the firm, if only because German tax authorities now take such a dim view of such tactics. No doubt Freshfields has sufficient professional indemnity cover to meet claims that might be made, although it’s reasonable to suppose that partners in London (and other non-German locations) might be unhappy at having to make contributions.

Meanwhile reputational damage is already obvious – the German government has distanced itself from Freshfields and made clear it will not instruct the firm (when asked whether firms like Freshfields or others should be excluded from receiving future instructions, the German finance minister replied: ‘I cannot imagine that new assignments will be placed there’ – which is a nice way of saying they will not get any work). Might other EU governments follow its lead?

Similarly, in the corporate sector, German semiconductor manufacturer Infineon (market cap of $30bn) was forced to justify retaining Freshfields as legal counsel after one of its shareholders challenged the firm’s ethical standards. GCs we surveyed for The Legal 500 Deutschland voiced their anxiety about being ‘thrown into the same pot’ by continuing to instruct a firm associated with ethically suspect advice. And with peer firms in Germany already grumbling about the impact of the scandal on recruitment into their tax departments, how can Freshfields hope to safeguard its own longer-term position in the market?

There are indications that this is not a one-year problem, and that there are more deep-seated causes for concern. At The Legal 500 it is noticeable to me that in recent years there has been a sharp decline in the number of Legal 500 top-tier recommendations globally for Freshfields (compare 90 in 2017 and 51 this year). Perhaps that is due to the firm being less open and transparent about its work, but I suspect it runs deeper than that – and it reflects less enthusiastic recommendations from clients and peers, as well as a change in the culture of the firm.

Global law firms build their practices on the basis of global expertise (which Freshfields has in abundance), but also on a global reputation. In effect, global clients want to be associated with the best and they want to be associated with legal brands that enhance their own corporate values. The danger for Freshfields is that cum-ex makes it a target of global activism (for instance, by tax-transparency campaigners in the UK) which might escalate into further bad PR. And that may then lead some major clients to question whether there are other law firm brands that they might prefer to be associated with.

That is the big unknown for Freshfields. With good fortune this will remain a localised (German) crisis. With bad luck it could turn into an international embarrassment.

The future reputation of Freshfields will be decided in the medium to long term. In the short term, I note the firm’s decline in our rankings. I note the negative comments from German GCs. I note some significant departures. I note a culture that seems to be more inward-looking and less transparent than it was a few years go. And I worry that the firm may have become over-aggressive in its pursuit of profits.

Above all else, it is client perceptions that matter. On that basis, if Freshfields was quoted stock, my buy/hold/sell recommendation would be: ‘Sell’.

John Pritchard

Der Freshfields-Skandal

It’s 9 September in the German parliament. Stefan Liebich of the democratic socialist party, Die Linke, stands up to quiz finance minister Olaf Scholz, a member of the Social Democrat Party. His question:  ‘Have there been any thoughts on your part whether firms like Freshfields or others should be excluded from receiving future instructions?’

Scholz responds: ‘In relation to the law firm you mentioned… I cannot imagine that new assignments will be placed there’.

For any normal law firm that would be a body blow. For an international firm with 27 offices in 17 jurisdictions, representing financial institutions and governments, as well as national and multinational corporations, it is a humiliation. How did the oldest international law firm in the world end up with such a public slap-down? And what prompted Scholz, one of the candidates to succeed Angela Merkel, to suggest the German government should stop instructing Freshfields?

The answer lies in the cum-ex tax fraud scheme, widely acknowledged as the biggest tax scandal in Germany’s history, in which Freshfields Bruckhaus Deringer has been identified as a major player. Since its offices were first raided in the autumn of 2017, Freshfields has been hit with a steady stream of bad press for its involvement in the scheme. In August 2019, liquidators of the now defunct Frankfurt-based lender and Freshfields client, Maple Bank, which conducted cum-ex trades, sued the firm for damages. Freshfields agreed to a €50m settlement.

Cum-Ex: What is it?

The cum-ex scandal involves a controversial dividend arbitrage trading practice, which took advantage of a loophole in German tax law. It involved banks and stockbrokers rapidly exchanging shares with (cum) and then without (ex) dividends between three parties, in a way that enabled them to hide the identity of the actual owner. At least two of these parties then claimed rebates on capital gains tax that had only been paid once. These trades were executed between 2001 and 2011, and were formally prohibited in Germany in 2012. Because of these deals, billions in tax went uncollected by the German state. Other countries beyond Germany have also been affected by the cum-ex tax fraud scheme. Across Europe, cum-ex trading is said to have cost taxpayers up to €55bn.

Reporting has largely focused on investigations surrounding the departure and subsequent arrest of partner Ulf Johannemann, the firm’s former international head of tax, in November 2019. More recently, in June 2020, another tax partner, who was the firm’s last specialist for tax products in Germany and an alleged adviser on cum-ex products, also left Freshfields and was charged with aiding and abetting serious tax evasion.

Freshfields’ direct response to the whole matter has appeared subdued. The fact that the firm created a  German ethics committee, with a code of ethical principles and rules of conduct, in May 2020, perhaps was a belated acknowledgement of the need for change but was unable in practical terms to extricate the firm from the scandal.

What is clear is that the cum-ex scandal has shaken the entire tax sector and in turn inspired reflection on the professional and social responsibilities of major actors such as Freshfields. As a result, law firms’ approach to the circuitous issue of ethics now has greater impact on law firm selection decisions.

We spoke to top general counsel (GCs) in Germany to gauge their reaction: to what extent will ethical standards play a role in choosing a law firm? Should a law firm’s work be not only legally but also ethically and morally sound? Will GCs be content to work with Freshfields (and other firms) implicated in the cum-ex scandal? And what reputational damage – if any – will those firms suffer?

Legal or illegal? Moral or immoral?

Structured finance in tax law is not new, departments for tax-optimised products at financial institutions are not new and, indeed, tax arbitrage and dividend stripping is neither new nor criminal. To the frustration of tax lawyers, some falsely lump together cum-cum and cum-ex deals – two different types of dividend stripping – and most would agree that the illegality of cum-ex is not as straightforward and quite as obvious as, say, the carbon trading tax fraud (which has similarly been dubbed the ‘fraud of the century’).

Nonetheless, to  many tax lawyers, cum-ex deals, which essentially involve claiming tax credit twice on taxes only paid once, simply didn’t feel right. The market quickly divided into those who gave legal opinions and those who didn’t. Freshfields positioned itself in favour of these trades and their approval was key to banks going ahead with the transactions. Importantly and – in retrospect – embarrassingly for Freshfields, two of its leading competitors, Linklaters and Hengeler Mueller, both took a more conservative approach – and did not provide the necessary legal opinions to make cum-ex deals viable. So it appears that Freshfields was the outlier – albeit in a highly profitable sector of the tax market.

Looking back, tax lawyers agree that attitudes to tax avoidance have changed since the 2007/08 financial crash. Advice on tax reduction was previously very much the primary focus for many tax departments, and aggressive tax planning was not out of the norm. While this may still be the case for some, the cum-ex scandal has no doubt contributed towards a shift in attitudes. These days, the new key theme is risk minimisation. Clients’ appetite for risk has decreased dramatically and, as one tax partner at a large international firm points out, there are now even sustainability reports in tax law. Today, there is a completely different kind of awareness than there was ten years ago – and that new approach goes hand in hand with a call for transparency.

One might still argue that the tax adviser’s job is to assist the client with paying only those taxes that are required, and the point of tax advice is to arrange fiscal relations in order to pay the least taxes necessary. At the same time, however, as a GC and managing director at a major software company points out: ‘As an independent body responsible for the administration of justice, the lawyer also has obligations to society that exclude representing unethical practices’. While this latter commitment might have limitations, for instance in relation to representation in criminal proceedings, the ethical component of legal advice is actively influencing companies‘ choice of law firm.

Traditionally, ethics and law go hand in hand. Law firm partners should have an innate moral compass. On that basis no distinction should be necessary between legally sound and morally or ethically justifiable advice, and for corporate counsel this distinction should not play a role either when mandating a firm. Ethics committees and supervisors should therefore – in theory – be superfluous. But that traditional approach is now seen as old-fashioned and incompatible with some aggressive profit-driven clients demanding aggressive profit-driven solutions. The danger for any law firm is that it is obliged to adopt the moral compass of its important (high-profit) clients and place money-making over traditional ethics. That is a problem that faces all major firms, not just Freshfields, although it is Freshfields that is providing a case study in how high-profit work can come at a reputational cost.

What is significant from our conversations with German corporate counsel is the indication that client prerequisites are changing. While ethics were ‘taken for granted as an unwritten law’ (in the words of the GC at a major German manufacturer), that is seemingly going to change, with a greater expectation on firms to take responsibility for clear ethical policies and positions.

Today, nobody would deny that the cum-ex scheme is a crime against the taxpayer, so how is it that some tax lawyers and some firms – not just Freshfields – committed to approving these deals? Several GCs have commented  on corporate law firm culture and what they perceive to be changes in law firm behaviour: ‘These institutions change people’, according to the head of legal at a multinational financial services company, adding that they believe there is ‘an attitude that everything which is not legally prohibited is allowed.’

‘Two rotten apples discredit the entire firm’

So, who should take the blame for overstepping ethical boundaries and getting involved in what later transpired to be a huge tax evasion scheme at the taxpayers’ expense? From the GCs’ point of view, some maintain that the focus should remain on individual lawyers or, at most, specific legal teams.

Possible misconduct by individuals does not automatically mean misconduct by everyone else. But the cum-ex scandal has shown that an individual’s actions may lead not only to that individual’s reputation being damaged but that of an entire department will likely suffer as well. By extension it is entirely feasible that repercussions could end up being firm-wide. As a senior regional counsel at a medical technology company puts it: ‘Two rotten apples discredit the entire law firm… the behaviour of individual representatives of a law firm suggests the approval of unethical behaviour by other colleagues.’

Whether flawed culture has afflicted Freshfields is uncertain, but the danger for the firm is one of perception: whether those two malefactors are seen (fairly or unfairly) to indicate a deeper-seated problem in the larger organisation. At the very least, the crisis poses questions over internal checks and balances. The GC at a US retail company makes a blunt assessment: ‘The firm’s role in the scandal must be made clear and there needs to be a statement about the firm’s values, to which it will adhere in the future.’ Freshfields’ May 2020 code of ethical practice might have sought to answer the second part of this, but the risk for the firm is that it is seen as no more than a belated PR exercise to try to distance itself from the ongoing bad publicity without directly confronting the part it played in cum-ex matters.

Conversations with German GCs show that specific individuals’ or departments’ involvement in unethical behaviour is the most relevant factor. However, when it comes to securing new business, the focus is on the entire law firm.

Beyond not wanting to be associated with questionable ethics, some corporate counsel already go one step further and consider themselves to be ethical guides whose job is to set out the right path not solely on a legal level. One respondent, in their role as in-house counsel at a German consumer electronics company, sees themself ‘as a kind of moral compass for the company’. As such, mandating a firm involved in the cum-ex scandal goes against the grain.

‘Legally clean work is no longer enough today,’ they comment. Instead law firms are subjected to a holistic analysis by legal departments, and this in turn means ethics and morality are increasingly and more explicitly incorporated into corporate decision-making processes. If firms do not meet ethical standards, this may be reason enough not to mandate them. This is where reputational damage potentially has a snowball effect. Corporate counsel will be reluctant to be seen as approving of seemingly unethical behaviour. As a GC at a food services conglomerate states: ‘If some clients avoid the firm, remaining clients could feel they have been thrown into the same pot morally.’ In short, clients end up needing to justify mandating a firm whose ethics have already come under question and whose reputation has already taken a hit.

Freshfields has already come close to this scenario. In February, the giant German semiconductor manufacturer Infineon (market cap of $30bn+) was forced to justify retaining the firm as legal counsel after one of its shareholders challenged the decision’s ethical standards. ‘The board of directors instructed the law firm Freshfields, which is said to be responsible for what is probably the biggest tax robbery in post-war history,’ stated the shareholder, pointing to a violation of Infineon’s code of ethics and its code of business conduct.

Fairly or not, that is the context in which finance minister Scholz indicated that the German government should no longer instruct Freshfields. If the German government will not instruct the firm, then the pressure on GCs (German and non-German) not to appoint it may be ratcheted up another notch. The obvious danger for Freshfields with state intervention of this kind is that a local problem becomes a global problem – and that the governments of other countries decide that they should distance themselves from the firm.

The resounding message from clients is that any firm involved in an alleged scandal should not simply keep quiet. Instead, the firm should openly address and deal with its behaviour. As a first step, a firm should ‘fully clarify [the involvement in the scandal] and, if necessary, distance itself from unethical individuals’, says a senior regional counsel at a medical technology company.

A director of legal operations at a multinational pharmaceutical company agrees: ‘What matters to us is that law firms deal transparently and consistently with the issue.’ This includes ‘open communication and consequences of possible participation’. They point towards the need for documentation of measures that are being taken to prevent such a situation from arising again, sustainable instruments for monitoring and control, as well as training.

On top of that, they call for ‘a very clear statement from the firm’s management on the ethical principles to which the employees are obliged’. The Infineon example illustrates the dangers for firms not perceived to have taken up a proactive commitment to ethical standards, where that commitment has often already been taken by the client itself.

Indeed, some GCs report that they already include ‘ethical standards and values’ in their assessment when selecting preferred legal advisers, and law firms are increasingly measured against codes of conduct. This also reflects the larger trend within corporate companies, and the same is now expected of their business partners, including their legal advisers.

An existential threat?

No doubt, the consequences of being involved in the cum-ex scandal are existentially threatening for some individual financial, and also some legal advisers in Freshfields and other law firms (Freshfields was not the only law firm implicated in the global cum-ex market).

But it goes beyond the individual. As the cum-ex tax fraud scheme has engulfed law firms across Europe, departments and firms as a whole may need to delve deeper, openly evaluate the ethical aspects of their own practices and put new measures in place that reflect today’s call for transparency, accountability and ethical standards.

The results of our informal survey of German GCs showed that 88% agreed that firms involved in the scandal would suffer reputational consequences, and the same percentage claimed to take ethics into consideration when selecting a firm. Less than a third claimed to be content to work with implicated firms.

For months, Freshfields took little obvious public responsibility for its cum-ex advice. Only in late February did the firm for the first time issue a self-critical statement, when managing partner Stephan Eilers spoke with the German weekly newspaper Die Zeit. Previously, the firm’s official line focused entirely on the legality of its advice with no comment on the criminal legal proceedings against its partners or the damage claim settlements over its advice to the now defunct Maple Bank.

In a tentative change in communications, Eilers acknowledged that its advice in the context of cum-ex deals is not a glorious chapter in the firm’s history. The timing of this first open recognition of reputational damage strongly suggests it was spurred by the Infineon incident: it shortly followed Infineon’s AGM, where the Freshfields client was forced to justify using the firm.

Only a few months later, in May, Freshfields recognised the need to address its ethical standards by establishing an ethics committee and publishing its code of ethical principles and rules of conduct. But by then much harm had already been done. The clear message from some German GCs is that they still feel they are waiting for clarification from Freshfields on the role the firm played in cum-ex advice. Instead, Freshfields has become known for a wall of silence.

‘What matters to us is that law firms deal transparently and consistently with this issue.’

What will the firm do next? One suggestion from the reputational-damage casebook might be to appoint a credible outsider to conduct an independent review, which would then be published. That might go a long way to reassuring clients that the firm retains its moral and ethical compass. The model might be the searingly honest review commissioned by house-builder Persimmon in 2019 (which confronted the issue of whether high earnings had come at an unacceptable cost). There is no historical precedent for a Magic Circle firm doing that; Freshfields had no comment in response to this suggestion being put to them.

GCs report that relationships with firms allegedly involved in the scandal are likely to come under increased scrutiny, although relationships would not be immediately terminated. However, when it comes to new instructions, alleged involvement in cum-ex deals is seen as much more likely to rule out a firm from selection.

In short, existing relationships may – for now – continue, albeit harmed, while new relationships have unquestionably been jeopardised: ‘I consider it impossible to instruct law firms known for such practices,’ says one GC. ‘Freshfields Bruckhaus Deringer will suffer reputational damage for a long time due to Ulf Johannemann’s advice,’ states another.

There is also an expectation that there will be more accused parties, more proceedings and more who will suffer the consequences. When speaking to tax lawyers at firms and to their clients there is certainly the sense that the entire sector has suffered a blow.

For Freshfields’ new leadership team of senior partner Georgia Dawson and the three joint replacements for Eilers – Rafique Bachour, Alan Mason and Rick van Aerssen – these problems are first-hand and real. The firm’s reputation has been trashed in Germany in a way that would have been inconceivable a few years ago. There may be other global issues to contend with, ranging from the strategic (can the firm establish itself in the US and what additional pressures do those efforts place on the already brittle lockstep pay structure?) to a series of significant departures (notably that of M&A co-head Bruce Embley to Skadden, Arps, Slate, Meagher & Flom on the eve of Dawson’s election). However, those may yet pale into insignificance compared to the potential damage to the firm’s standing caused by the cum-ex scandal. Ultimately a Magic Circle law firm trades on its reputation – damage that, and you can end-up damaging the whole firm.

Stop press

At the end of January it was reported that Freshfields had made a voluntary payment of €10m to the Frankfurt Public Prosecutor’s Office (PPO), and that the PPO no longer pursuing the firm as a concerned party in connection with Maple Bank. Freshfields said that the move followed “constructive dialogue” with the PPO and had not admitted guilt and/or liability. While Freshfields’ hope will be that a line can be drawn underneath the affair, their efforts to move on seem unlikely to be helped by the cum-ex scandal rumbling on in Germany and beyond (with Danish prosecutors now investigating and charging traders with tax fraud). Cum-ex long since moved from dramatic incident to long-running saga, and the consequent fundamental problem for Freshfields seems likely to be one of long-term reputation, heavily damaged by association with the largest tax scandal in modern European history and unanswered questions over how the firm allowed itself to be implicated in the first place. €10m will not buy back that reputational damage.


Research: Anna Bauböck, Editor of  The Legal 500 Deutschland.

Commentary: John Pritchard.

All interviews with German GCs and corporate clients were carried out in September 2020.