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#12 - JRL 2009-103 - JRL Home
Date: Tue, 2 Jun 2009
Subject: Part 5, 2009
From: Paul Backer <pauljbacker@gmail.com>
The 2009 Financial Crisis, Russia and CIS
Part 5. Medvedev’s Proposed Legal Education Reform
By Paul Backer (pauljbacker@gmail.com)

This got mentioned in a previous piece, a strange thing about writing is people reading what you write. Sometimes, very surprising people. Recently, I received an inquiry from a RF official that I wanted to respond to in detail. As a guest in Russia, one wants to be a good one. I do start by saying that what I think about anything addressed at the Presidential level of a country is at best, irrelevant, but nevertheless, it is an issue worth discussing and relevant to surviving and prospering during the crisis.

The question was what I thought as a lawyer practicing in the region for 15 years, about President Medvedev's legal education reforms and do I want to share my thoughts on R****a T***y? Short answers: optimism on reforms, and would not share anything with that organization unless a human life depended on it.

Having recently attended my brother’s law school graduation in Virginia I may still be affected by the (literal) pomp and circumstance, and the ritualistic speeches as to how lawyers are entrusted to run the world. I don’t think that’s completely true, and certainly not true for the bottom 80-90% of the law schools, but we, lawyers do have our hands on some interesting machinery. At the same time, one can’t help suspecting that the speeches at plumber school graduations are probably very similar.

This only salts the multiple wounds suffered by entrepreneurs during this crisis, but the legal profession proved to be one of its key beneficiaries. Attorneys were as bloodied and bowed by the firings and loss of foot traffic as other executives and entrepreneurs, but with a difference. It’s interesting to suddenly become the “save my project/company/ass” guy instead of the “get the stamp/signature and be quiet about it” guy. M&A, project finance, IPO, Eurobonds, etc. may be in the doldrums, but labor, shareholder derivative, fraud, recovery of troubled assets, asset protection, SPV, etc. are up dramatically.

Some have suffered for our sins. If I wasn’t afraid of litigation, I would post a copy of a billing sheet being passed around the Moscow (legal) community, wherein a senior attorney in a major firm in Moscow billed out 6 hours in a… wait for it… wait for it… week.

Largely, survival in the post-crisis world became about what your lawyer can do for you. A good one can do some pretty vital stuff: bankruptcy, salvage and repackage troubled assets, renegotiate contracts and leases, special purpose vehicles (SPV), asset sequestration, loan syndication, portfoliozation, etc. Reading the New York Times Business Section on a recent trip home I was shocked, well not really shocked, it’s hard to pick a word… startled? impressed?... whatever, that several articles centered on lawyers: GM bankruptcy, expensive divorces for financiers, restructuring troubled assets and an additional article on hotel management.

Seems like your chances of surviving the crisis may largely depend on availability of good counsel. Any crisis, particular global financial crisis is a stress test. I don't mean a stress test in the form of kindly FDIC and Treasury number massagers visiting your HQ loaded with imaginary scenarios, ready for free tea and coffee and hoping against hope to declare your financial institution hale and hearty. I mean a stress test in the sense of having to give your office furniture to friends, family and ex-girlfriends.

Speaking of the Treasury and FDIC, the bank bailout scheme appears to function as a brilliant scam on those idle enough to be savers, taxpayers or not receive bailouts. Central banks and Treasuries lend (give?) banks bailout funds at 0 to 50 basis point (1/2 of 1%) interest on the condition that these funds not be lost, in other words not lent to private companies which put it at risk by generating jobs, revenue, paying taxes, etc. The government “lends” at 0% interest so that funds can be “invested” in government debt at 2 to 4%. The banks “invest” these funds in Treasury or Central Bank debt instruments at 2 to 4% interest, and voila… 400% or more profit at no risk other than national default. Want to see Ci*ibank make a $2 - 4,000,000,000 profit? Easy, give them $100,000,000,000 in help and stand back. Good for the bailed out banks, not so good for their competitors, private companies, taxpayers, etc.

Back to why lawyers are important in a crisis. Despite persistent claims of peculiarism, Russia is no exception. There are signs of stabilization, financial corporate and securities projects appear to be on the distinct uptick. At the same time the number of vacant stores, vacant offices, recently fired executives, repatriated ex-pats, and other signs of street-level failure continue to proliferate. The crisis has severely tested the Russian legal system.

The crisis led to a litigation explosion, some so exotic as to appear bizarre. The spread of litigation arguing that transactions where funds were transferred, acknowledged, receipted and… never existed both strain the bounds of credulity and became so widespread that the head of the RF arbitrage courts formally advised that the court takes a dim view of this type of litigation. You can still win, and avoid payment for a year or more, but the court will think less of you. We saw the spread of litigation that appears in no meaningful way connected to the nexus of the transaction or common sense. One of the clearest examples is the much commented upon litigation against Telenor.

We have seen an explosion of Mosaic litigation. Litigation showing strong indicia of being intended solely for the purpose of imposing crushing legal costs on the opposition. A case of “if you can't beat them, impose a couple of million dollars’ worth of legal costs on them”, particularly if they are blessed to be represented by a major Western law firm billing out at $800 per hour. This enables litigation parties with counsel capable of establishing and implementing a viable litigation strategy to inflict devastating costs on their opponent at a low funding and manpower expense.

As it often happens at transaction level, what is good for a particular client/transaction is a disaster for the system as a whole. Transactionally, it may be highly advantageous to enable a client to avoid paying bills owed for a year or more. Transactionally, it may be highly advantageous to inflict crushing legal engagement costs. An effective lawyer’s ability to utilize the RF/CIS developing legal systems to negate the substance of a transaction for the benefit of a client is undoubtedly of high utility to that one client.

In systemic terms it is a disaster. It is disastrous in terms of public policy of aiding companies find their way back from the precipice of the financial crisis if a determined litigant can render the system nonviable at costs as low as $15-$25,000 per year. If one can’t enforce contractual payments due, the system will fail. If the system rests on weak, undertrained, undereducated and otherwise compromised legal cadres, it will fail.

Therefore, the concern of the Russian Federation President Dmitry Medvedev with reforming the legal profession in Russia appears to indicate a well targeted and developed sense of priorities. The return from the precipice of the RF ruble exchange rate and the stock market rebound can be argued to show that some of the reform programs by the RF Government were effectively targeted and implemented.

The Russian legal system has structural challenges that are to a great extent unavoidable in any legal system of fairly recent vintage undergoing rapid and dramatic development. These ills are exacerbated by what can be fairly described as a concerted and systemic devaluation of legal education in the Russian Federation and much of the CIS. Far too many legal institutions graduating far too many lawyers, many lacking qualifications for legal practice.

There is a key distinction between legal education in Russia and legal education as we know it in Western Europe and the United States. For many of us in the legal profession, legal education is the second university degree that we receive. In Russia and the CIS the law degree is the first degree. Many Russian law students intern as legal professionals during their education. This may actually include 19 year old college sophomores participating as legal professionals in criminal prosecutions, civil litigation and many other places where the world perhaps is not ready to see college sophomores.

One of the striking legacies of post-communist legal education is that being qualified as a judge is not a recognition of professional standing or experience, but a type of college law degree received by a graduate. The challenges in educating legal staff may not be a particularly difficult issue if your litigation takes place in the capitol. If you are litigating in Moscow or Kyiv or arguably, Almaty (well… I did teach at KazGYuA and KIMEP) there is a deep and reliable pool of capable and experienced legal and judicial talent to draw on. It is a very significant issue in the regions where you may confront the triple whammy of counsel and judges who may lack experience, knowledge of substantive law and professional qualifications.

In light of the increasing importance of the judicial system in Russia in commercial dispute resolution, President Medvedev's reform proposals appear sound, well reasoned and timed. At one point Moscow reportedly had more law schools than Washington D.C., Boston, New York City and all of California combined. Probably that is a few too many law schools.

While it may be an economic issue whether Moscow needs 40 or 50 law schools, it is clear that there are simply not enough trained and capable faculty to fill these law schools or students to learn there. A strong case can be made for reducing the number of law schools nationally. Doing so will make it possible to unite the best faculty and students to ensure that strong, capable attorneys are produced as a result of their education.

A case has been made that the number of law schools should be a purely economic decision. This case fails to reflect the unique nature of law schools and their graduates. Attorneys occupy a unique space. We are entrusted with the property, rights, and sometimes the freedom of our clients. Your attorney is your champion, he should be able to mount a horse and carry a lance without falling off or poking himself in the eye. This brings us to the next element in the proposed legal reforms: attorney licensing.

Without getting too deeply into the collegiums framework of licensing litigators or the historical factors leading to the current system, it can be argued that today Russia lacks an effective national licensing schemes for attorneys.

As an American legal professional, I view the bar exam as both a core rite of passage for legal professionals and a key protection for clients. It may sound somewhat ridiculous that 15 years into a legal career I would note with substantial personal pride that I have never had a client complaint lodged against me, but nevertheless that is so. As someone who has been involved with legal education in Russia and the CIS for well over a decade I strongly support the call for universal national licensing of attorneys to be admitted to practice. If for no other reason than that it provides an effective tool for protecting the clients from the unethical and incompetent. Perhaps, thought should be given to national licensing of hedge fund managers?

Finally, the somewhat underappreciated topic of clinics. President Medvedev's call for the establishment of clinics at the law school level is much more significant than it has been given credit for. Clinics are established at the law schools to enable indigent and underprivileged clients to obtain free legal advice given by law students, hopefully under adult supervision. Historically, in the US and in Europe these clinics have not only helped train students in the practical aspects of law, but they also helped the economically disadvantaged, ethnic and other minorities and other groups lacking material resources to effectively gain the protection of the law.

It is very difficult to make a reasoned argument for something that to me seems obvious, entities such as clinics that both train future counsel and give access to legal protection to clients including the elderly, children and battered spouses would clearly seem to be a positive step.

It is worth noting that the current legal reform initiatives proposed by President Medvedev, both closely mirror practice in the U.S. and Europe and the recommendations for legal education reform in Russia consistently given by governmental, professional and nongovernmental organizations outside of Russia.

NOTE: In an effort to increase output, I have made the switch to software that types as I speak. This has had the twofold impact of somewhat increasing printed word output, while dramatically reducing the quality of the grammar. Apologies.