The bank-on-bank litigation taboo has fallen in Europe. So far it's been a boon to US courts, and to one US firm in particular. Michael Goldhaber reports

In 2002, a German bank in the backwater of Kiel, on the shores of the Baltic Sea, sought to boost its returns by investing in a synthetic credit default obligation (CDO) issued by Swiss banking giant UBS. The investment was a disaster: a near-total loss of $500m (£306m). When the German investor, now called HSH Nordbank, sued in February 2008, it became the first non-US party to bring a significant credit default case and made UBS the first non-US bank on the receiving end of one. This case between two European financial institutions is at the forefront of financial crisis claims on two continents – but mostly, ironically, in the US.

HSH Nordbank accuses UBS of exploiting its dual role as the CDO's arranger and collateral manager by knowingly selling securities with embedded losses, lying about it and mismanaging the structure for its own profit while keeping two sets of books: one with inflated values for HSH's consumption and one for internal accounting. In HSH's analysis, the portfolio was already $150m (£92m) in the red at closing.

HSH filed its claim in the US, while UBS countersued in the UK. In June 2009 HSH defeated UK jurisdiction in the English Court of Appeal. In a deal with multiple and inconsistent jurisdiction clauses, the UK judges held that jurisdiction should be set by the clause in the agreement "at the commercial centre of the transaction". That left the ball in the court of New York state Justice Richard Lowe III, who – in a little-noticed September ruling – largely denied UBS' motion to dismiss HSH's amended complaint. Crucially, Justice Lowe ruled that HSH's fraud claim was sufficiently well-pleaded – if ever-so-narrowly – to proceed. A potential trial on both fraud and contract theories looms next autumn.

The HSH case epitomises the new wave of common law fraud claims for structured deals in at least two ways. First, it is being decided in a US court. Virtually all derivatives contracts specify either New York or English law. Claimants prefer US courts, mainly because of broader discovery. The HSH precedent makes it more likely that they can stay there.

Second, HSH's suit is being brought by Quinn Emanuel Urquhart Oliver & Hedges, which opened an office in London last year with the hire of restructuring and litigation partner Richard East (pictured right) from Kirkland & Ellis. The firm is almost alone among the Am Law 200 in eschewing all transactional work – and the resulting lack of conflicts gives it a competitive edge. While the taboo against bank-on-bank litigation has weakened among banks, it has not weakened among major law firms.

"Supplicants at the altar of business don't have the luxury of suing banks," observes partner David Bernick of Kirkland & Ellis, speaking of all institutional law firms. Acting for a client, Kirkland recently contacted 30 London law firms before it found one taker for a matter against two big banks, and that experience is not unusual.

Quinn Emanuel founder John Quinn saw the need for a law firm willing to sue money-centre banks in both London and New York. "You didn't need a financial crisis to know that there would be opportunities for claims against large financial institutions," he says. When the crisis came, Quinn was ready. He opened a small London office in May as an outpost of a structured products group that has about 90 lawyers firmwide and a projected $80m (£49m) in 2009 revenue.

It is fair to say that Quinn Emanuel dominates the docket for common law fraud claims against banks that arise out of the credit crunch. Other firms also have key test cases, but none of these are top US law firms. The CDO claim by M&T Bank against Deutsche Bank, which has additionally survived a motion to dismiss, is being brought by Hodgson Russ, from M&T's hometown of Buffalo, USA.

The suit by Pursuit Partners against UBS, in which a Connecticut state judge has requested $35m (£21m) as a prejudgment remedy, belongs to Denver boutique Burg Simpson Eldredge Hersh & Jardine. The Abu Dhabi Commercial Bank case against Morgan Stanley and its rating agencies, moving forward in the southern district of New York, is led by class action shop Coughlin Stoia Geller Rudman & Robbins.

Collectively, Quinn Emanuel's cases illuminate the alleged business practices that led to the crisis, along with the bank's defences, and show how common law theories of structured finance fraud are taking shape. It is too early to make a call on how successful they will prove, but rival litigators with conflicts certainly regard Quinn's business model with wistfulness.

Quinn Emanuel's most eager (or desperate) client is monoline insurer MBIA, which guaranteed a huge swath of the structured finance market. Quinn Emanuel's favourite target is Bank of America, which had the courage (or stupidity) to buy two of America's most active securitisers: Countrywide Financial and Merrill Lynch.

MBIA complains that it has already lost $1.4bn (£800m) on Countrywide's residential mortgage-backed securities because the bank routinely violated its own underwriting guidelines (which sometimes were not very strict). According to MBIA's underwriting review, 91% of the loans-gone-bad violated the guidelines. Even Countrywide's 'Super-Streamlined Documentation Program' was allegedly not lenient enough for these green-light bankers; Quinn Emanuel says they often did not make one call to verify income. In July, New York state court Justice Eileen Bransten largely denied a motion to dismiss by Countrywide. Bank of America, represented by Goodwin Procter, argued that MBIA had full information, but Justice Bransten expressed doubt about how much information on the securitisations MBIA could realistically access. A parallel case is pending under California 'blue sky' laws, and a similar claim against Countrywide has been brought by Quinn Emanuel on behalf of United Guaranty, a subsidiary of American International Group.

Merrill, which bought MBIA coverage on $5.7bn (£3.5bn) in CDOs, is the subject of equally damning allegations. MBIA claims that Merrill lied about the likelihood of default for both the CDOs and their underlying collateral, and puffed the past performance of similar CDOs. When the US housing market began to crack in late 2006, MBIA argues, Merrill embarked on a scheme to 'de-risk' its own portfolio by stuffing new CDOs with its worst-performing assets. Justice Bernard Fried of New York state court cleared the case for discovery in November, while considering a motion to dismiss.

On other fronts, MBIA and Quinn Emanuel have broadly similar cases against IndyMac ABS and Royal Bank of Canada. At the same time, MBIA (represented by other counsel) is itself fending off three fraud claims. These assert that when MBIA restructured, it hid $5bn (£3bn) in assets from noteholders, bank policyholders and hedge fund policyholders.

In addition to MBIA v Merrill, Justice Fried is weighing dismissal in two more Quinn Emanuel cases alleging CDS fraud: Ambac Credit Products v Citigroup and Rabobank v Merrill. A second Quinn Emanuel fraud case against UBS, brought by Bank of the West, awaits briefing on a dismissal motion in California state court and a third, brought by Paramax Capital International, settled early. (Quinn Emanuel also has an array of purely contractual CDS cases, with a range of early results.)

The first final ruling on a Quinn Emanuel claim for structured finance fraud only came in October, in Ramius Capital Group v Bear Stearns. There, a Financial Industry Regulatory Authority panel concluded that Bear Stearns recklessly omitted material facts in its mountainous disclaimer, but awarded less than $2m (£1.2m) including interest on a $16.5m (£10m) fraud claim because, in its view, the losses were largely caused by unrelated market forces. Both Quinn Emanuel and opposing counsel from Paul Weiss Rifkind Wharton & Garrison find solace in the result.

In their defence, every bank from Countrywide to UBS denies wrongdoing. They broadly argue that the plaintiffs were sophisticated players, enjoying the benefit of ample knowledge and appropriate disclosure – not to mention voluminous and airtight disclaimers. One illustrative Merrill contract stated simply: "Reliable sources of statistical information with respect to the default and recovery rates for [this] type of securities‚Ķ do not exist." And well into 2007, the Federal Reserve and the International Monetary Fund were sure that the subprime rot would not spread.

"For crying out loud, there was a global meltdown in the credit market," says one lawyer who asked to remain anonymous because he is defending a bank. "A lot of people lost money. Plaintiffs lawyers are making a lot of hay vilifying the big banks. That doesn't make them all bad actors."

Frank Partnoy, a derivatives guru at the University of San Diego School of Law, thinks that broad disclaimers are part of the problem for an industry that has yet to be held accountable. "The people who construct these complicated products," says Partnoy, "have erected barriers to regulation and have tried to make products litigation-proof by including elaborate disclaimers." Partnoy doubts that regulation will improve, so he is pleased that the taboo on litigation is falling. "It's a tragedy that we don't have many cases to guide conduct in this area," he says. "Quinn is performing a valuable role in feeling out which claims are available in common law."

Global finance professor Eric Pan of Benjamin N Cardozo School of Law would prefer better regulation of the derivatives industry. "I have all the standard concerns about private rights of action," he says. "Quinn might bring the wrong cases, or bring the right cases for the wrong reasons. Private enforcement is only one tool for controlling markets."

Back in England, in October Quinn Emanuel completed its first six months in London in bravura style by winning the first structured investment vehicle (SIV) case before the UK's newly constituted Supreme Court. Sigma Finance set the priority of creditors owed $6bn (£3.7bn) by the failed Sigma SIV. Four investors who had invested at different times presented vying interpretations of the SIV's security trust document. Tellingly, each of the four parties was counselled by a US firm: Quinn Emanuel, Jones Day, Mayer Brown and Dechert.

Mayer Brown argued that the SIV trust's scarce funds should be distributed on a first-come, first-serve basis. Dechert suggested a variation on that theme. But Quinn Emanuel and Jones Day persuaded the Court that commercial logic should trump more literal readings of the trust document – and that the funds should be distributed equally among all secured creditors, regardless of when their notes matured.

Quinn Emanuel's Sue Prevezer QC, who won the UK rulings in Sigma and HSH, sees "an uptick" in English credit crunch litigation. She remains extremely busy with the UK fallout from the demise of Lehman Brothers and Iceland's Kaupthing Bank. But Prevezer concedes that clients are still hesitant to litigate in London because the loser must pay the winner's legal fees. Her 10-lawyer office often pitches in on US derivatives claims, like HSH Nordbank's, that involve an element of English law.

Firmwide, the copious case flow shows no signs of slowing. Recently, large banks from China and Japan asked Quinn Emanuel to send a team of forensic experts to study their portfolio of derivatives trades for potential legal claims.

"The traditional unwillingness of the financial industry to litigate is gone and not coming back," says New York partner Philippe Selendy. "There is a realisation that certain players acted badly and [that there has been] a refusal by others to shoulder the losses. The tenor of this space has changed for the long term."

A version of this article first appeared in The American Lawyer, a US sister title of Legal Week.