JP Morgan Chase is setting aside $6bn (£2.9bn) to cover potential litigation as it agrees to buy stricken Wall Street giant Bear Stearns for just $240m (£119m).

Following the announcement on 16 March that it is buying the bank for a fraction of its previous value, JP Morgan said it is estimating the cost of the transaction at around $6bn – taking into account the potential of litigation stemming from the drop in Bear Stearn's stock value and severance costs.

The deal – which takes places against a backdrop of turbulent financial markets – will be closely watched by the US plaintiff Bar, representing one of the largest collapses in shareholder value in corporate history, with Bear Stearns being valued last year as high as $140bn (£69.5bn).

US class action specialist Stember Feinstein Doyle & Payne had already announced prior to the takeover that it was investigating possible legal action against Bear Stearns relating to its collapse in share price.

By the end of Monday (17 March), leading plaintiff firm Coughlin Stoia Geller Rudman & Robbins was already reported to have filed a shareholder suit in the Manhattan federal court while New York's Bernstein Litowiz Berger & Grossman said it would be likely to file an action soon.

So-called stock drop cases have been among the most lucrative sources of contentious work for lawyers in the US but securities litigation has dramatically fallen in recent years.

The sale is also being watched by deal lawyers, with Skadden Arps Slate Meagher & Flom brought in to advise Bear Stearns, with the New York leader fielding a heavy-hitting team under corporate partner Peter Atkins and including financial institutions co-head Fred White, corporate partner Frank Gittes and tax partners David Rievman and Ed Gonzalez.

Sullivan & Cromwell has been instructed for Bear Stearn's board of directors under chairman Rodgin Cohen, along with financial institutions partner Mitchell Eitel and corporate partner Jay Clayton.

Meanwhile, Bear Stearn's financial adviser, Lazard, has turned to Cravath Swaine & Moore corporate partners Robbins Kiessling, Richard Levin and Erik Tavzel.

In a surprise role, Wachtell Lipton Rosen & Katz has secured the prized lead M&A mandate from JP Morgan, despite the bank's traditional close links to New York duo Simpson Thacher & Bartlett and Davis Polk & Wardwell.

Wachtell, which is fielding a team under partner Edward Herlihy, is not regarded as a regular counsel to the bank but made inroads when Herlihy advised Bank One on its $58bn (£29.4bn) takeover by JP Morgan in 2004.

The rescue – already described as 'America's Northern Rock' – has been backed by the US Federal Reserve, which will lend $30bn (£14.9bn).

Bear Stearns has been at the centre of the US mortgage debt crisis, with JP Morgan's takeover saving the bank from collapse. The $240m acquisition price represents a substantial discount on its share price at the end of trading on Friday (14 March), which valued the bank at around $3.5bn (£1.7bn).

The collapse of America's fifth-largest investment bank could potentially have major implications for legal advisers as Bear Stearns has been a highly lucrative client to some of the US's top law firms for much of its 85-year history.

Most closely linked with the bank is Cadwalader Wickersham & Taft corporate heavyweight Dennis Block, who brought the client with him when he joined the firm from Weil Gotshal & Manges in 1998.

Other regular counsel to the bank include Sidley Austin, Orrick Herrington & Sutcliffe, Thacher Proffitt & Wood and Dechert, reflecting the bank's heavy exposure to the asset-backed securities market that has collapsed in the wake of prolonged turmoil in credit markets. Cadwalader, Thacher Proffitt and Dechert have all announced redundancies in the last three months, citing the severe drop-off in mortgage-backed securities work.

More coverage of the Bear Stearns saga can been seen from Legal Week's US sister titles The American Lawyer and New York Law Journal.

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