Nov. 19 (Bloomberg) -- When Michael McNicholas, legal counsel at HSH Nordbank AG in London, needed help suing UBS AG to recover $275 million in subprime mortgage losses, he didn't bother turning to the big London law firms for help.

``It's well known that the Magic Circle law firms will not take on work that conflicts with their priority clients,'' said McNicholas, referring to London lawyers and the banks they represent. ``It was a given that they would not act in a case like this, so we didn't even consider talking to them.''

Instead he interviewed several litigation boutique firms and picked Quinn Emanuel Urquhart Oliver & Hedges in Los Angeles, which has developed a practice suing banks because the biggest U.S. and U.K. firms won't.

The group of smaller concerns willing to take on the banks in commercial litigation also includes Boies, Schiller & Flexner in New York; Susman Godfrey in Houston; and Bartlit Beck Herman Palenchar & Scott in Chicago.

Quinn Emanuel, with more than 400 lawyers, is the largest of the four. Boies Schiller has 235 attorneys, Susman Godfrey 88 and Bartlit Beck 65. DLA Piper, the largest U.S. firm, has more than 3,700 attorneys.

Aside from its ongoing work for state-owned HSH, Quinn Emanuel reached a settlement with Citigroup Inc. on its clients' $2.4 billion investments in notes linked to Enron Corp.'s credit. The investors will receive $2.1 billion from the bankrupt Enron estate.

`Good Opportunity'

``For about two years we've been staking out a role as a firm that could be adverse to financial institutions,'' said Peter Calamari, head of Quinn Emanuel's New York office. ``It was a good opportunity for us to find a place in the market.''

Ethics rules restrict a firm from suing a bank that has been a client because of confidential data lawyers have had access to. Firms also don't want to make anti-bank arguments in court that may come back to haunt them in future defense work.

``You don't want to have your own briefs cited against you,'' said Alan Vickery, a partner at Boies Schiller, which has a committee that reviews such issue conflicts.

Boies Schiller has also sued UBS, Switzerland's biggest bank. On Sept. 17, a federal judge in Albany, New York, declined to throw out the firm's $62.7 million suit over auction-rate securities sold to Plug Power Inc., a fuel-cell developer Boies Schiller represents.

Litigation boutiques can do such work because they usually don't have corporate departments eager to pick up transactional assignments from banks.

No Conflict

Boies Schiller has a 26-lawyer corporate group, which makes bank-suing more complicated. Christopher Boies, head of the practice, said potential client conflicts are mitigated because the group typically represents corporate borrowers rather than bank lenders.

Bartlit Beck has an eight-lawyer corporate practice in Denver. By design, the group has no banking clients, said James Heaton, a partner.

``The costs to us are nil,'' he said of helping clients sue banks.

The firm's practice arose out of its representation of hedge and private-equity funds, Heaton said.

In November 2007, Bartlit Beck sued JPMorgan Chase & Co. for client Amaranth Advisors LLC, the hedge fund that failed in 2006 after losing $6.5 billion, accusing the bank of sabotaging its efforts to stave off collapse.

Bartlit Beck sued Citigroup and JPMorgan on behalf of three funds, saying the banks aided a fraud related to loans the funds bought out of Enron's 2001 bankruptcy.

Susman Godfrey

This year Susman Godfrey has sued banks including Citigroup, UBS and Morgan Stanley over auction-rate securities sold to its client, the city of Baltimore, and Wachovia Corp., JPMorgan and other banks over derivative sales for a group of local governments.

It also filed a complaint for shareholders against IndyMac Bancorp Inc., the Pasadena, California, savings and loan seized by regulators July 11 after customers withdrew more than $1.3 billion of deposits.

More work suing banks seems likely. Some 22 percent of financial-services firms said they were ``bracing for a subprime action or investigation'' in the next year, according to an Oct. 14 survey of 358 companies in the U.S. and U.K. by the Houston law firm Fulbright & Jaworski.

Counterparties to credit-default swaps, investors in bank- sponsored collateralized-debt obligations and corporate purchasers of auction-rate securities are likely to be looking for lawyers to sue banks.

More Litigation

``Are you going to see more of this litigation? Of course you are,'' said Marc Kasowitz of New York's Kasowitz, Benson, Torres & Friedman, another firm known for suing banks. In one case, Kasowitz represents Hexion Specialty Chemicals Inc. in its effort to force Credit Suisse Group AG and Deutsche Bank AG to finance its $6.5 billion takeover of Huntsman Corp.

After Bartlit Beck, Boies Schiller, Quinn Emanuel and Susman Godfrey, the list of likely courtroom champions ``runs out pretty quickly,'' Heaton said.

Law firms known for representing banks are likely to get more defense work as credit-crisis claims pour in. They include Paul Hastings Janofsky & Walker in Los Angeles, which represents UBS; Paul Weiss Rifkind Wharton & Garrison in New York, whose clients include Citigroup; and Simpson Thacher & Bartlett in New York, which has defended JPMorgan.

Fired Lawyers

Firms with slumping corporate practices might be tempted to go over to the other side if asked. Big U.S. law firms affected by the credit crisis have fired more than 340 lawyers as revenue for transactional and real estate work dried up amid an economic slowdown and rising bankruptcies. Firms that fired lawyers include New York's Cadwalader Wickersham & Taft and White & Case and San Francisco's Orrick Herrington & Sutcliffe.

``I think you will see some of the bigger firms, not really the biggest firms, shifting to more of a litigation strategy,'' Quinn Emanuel's Calamari said.

``Now that the banks are falling out of favor, we may see a new complement of law firms standing in against banks and other financial institutions,'' said Jacob Frenkel, a former U.S. Securities and Exchange Commission attorney in private practice in Rockville, Maryland. ``The luster is off the representation.''

To contact the reporter on this story: Thom Weidlich in New York at tweidlich@bloomberg.net.

Last Updated: November 19, 2008 13:48 EST