Too Little, Too Late? The Mass Exodus of Law Firms From Representation of Kremlin-Backed Clients

Too Little, Too Late? The Mass Exodus of Law Firms From Representation of Kremlin-Backed Clients

9.28.2022

By Alyssa N. Grzesh

Lawyers who take on the task of representing unpopular or unorthodox clients and causes are frequently the subject of heated debates and controversies. Such debates and controversies may produce a “chilling effect” on the availability of counsel, where “unpopular or unorthodox clients” are prone to experience much greater difficulties in implementing the constitutional right to representation and finding a lawyer who will agree to represent them.

When Russia launched a pre-dawn assault on Ukraine on Feb. 24, 2022, leading to massive destruction, suffering and one of the greatest humanitarian and refugee crises to face Europe since WWII – an assault that continues in full force seven months later – the legal community drew a line in the sand. Law firms struggle with the ethics of representing sanctioned clients. While representing unpopular clients is nothing new, the legal community has struggled to confront the magnitude of the moral questions presented by Russia’s invasion of Ukraine.^[1] Having generated billions in legal fees from Russian business, international law firms immediately faced intense pressure from their staff and politicians to distance themselves from Kremlin-linked companies and individuals, whether targeted by the restrictions or not.[2] Law professors at Stanford, Yale and Harvard set up a website to monitor major U.S. and U.K. law firms’ ties to Russia, and encouraged attorneys to end relationships with the Kremlin, state-owned or controlled firms, and sanctioned entities and people.^[3]

Readers may recall the tragic fate of Flight MH17, the Malaysian Airlines plane that was shot down over Ukraine in 2014.[4] Flight MH17 was brought down over territory held by the DPR, a Moscow-backed pro-Russian separatist force in eastern Ukraine, as it flew from Amsterdam to the Malaysian capital Kuala Lumpur, killing all 298 people on board. About two-thirds of the passengers were Dutch.[5] When fighting broke out in 2014 between the DPR, and forces loyal to the pro-Western Ukrainian government in Kiev, the Ukrainian government designated the DPR a terrorist group.^[6]

One of the victims, American Quinn Lucas Schansman, 18, was aboard Flight MH17 on his way to meet his parents for a family vacation. In April 2019, Schansman’s family filed a lawsuit under the U.S. Antiterrorism Act against U.S.-based money transfer companies and two Russian banks, Sberbank of Russia and VTB Bank, for providing services to the self-proclaimed Donetsk People’s Republic.[7] Russian lender Sberbank retained global law firms White & Case and Debevoise & Plimpton, and Latham & Watkins was retained as counsel by VTB.^[8] According to the lawsuit, filed in the Southern District of New York, “[d]efendants’ provision of material support to the DPR [Donetsk People’s Republic] was a substantial factor in the DPR’s ability to launch a missile from territory it controlled – an attack that killed Quinn and 297 other innocent victims.”^[9] Quinn’s father, Thomas Schansman, said in a statement, “We realize that we will never get our son back. But we are committed to shedding light on – and holding accountable – all who participated in his murder.”[10]

Sberbank is the largest financial institution in Russia, holding about one-third of all bank assets.[11] VTB, the second-largest lender in Russia, provides both traditional banking services and conducts investment banking operations through its VTB Capital arm.[12] VTB Capital opened its first U.S. office in 2012.[13] Atanas Bostandjiev, CEO for VTB Capital in London, stated in 2011, when VTB Capital was first given the greenlight by securities regulators to start an investment bank in U.S., “Our New York office will be our distribution hub from which we reach out to institutional investors interested in emerging market risk, fixed income or equity. Mainly we will be selling Russian corporate equity and debt to U.S. investors, but if we see U.S. companies looking to invest in Russia through private equity we will likely participate in that eventually, too.”[14]

Sberbank and VTB were already subject to U.S. sanctions, which imposed restrictions on a number of Russian banks in 2014 after Russia annexed Crimea. That round of sanctions sought to limit the ability of these banks to access U.S. debt and equity markets.[15] Executive Orders 13660, 13661 and 13662, all passed in March 2014, targeted those responsible for undermining Ukraine’s democracy and Russian officials operating in the arms sector, as well as those operating in Russia’s financial, energy and defense sectors. On Feb. 24, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control took significant and unprecedented actions to respond to Russia’s further invasion of Ukraine by cutting off the ability of Sberbank and VTB to process payments through the U.S. financial system.[16]

White & Case and Debevoise & Plimpton were able to exit the litigation when lawyers at the New York-based firm Wilk Auslander were retained to replace them in their representation of Sberbank, while Latham & Watkins was not able to withdraw. Brafman & Associates, a New York firm known for representing some unpopular clients, attempted to substitute in as defense counsel for VTB in early June, but could not enter the case until Latham & Watkins was paid for its services.[17]

“VTB deserves legal representation, the plaintiff deserves to have the claim resolved and the court deserves to have the case move forward, and we will continue to search for a solution,” Brafman attorney Marc Agnifilo said in an email. Although officials at the Office of Foreign Assets Control assured Agnifilo that payments to the firm for its representation of VTB would be legal despite U.S. sanctions, because the bank is named in a federal lawsuit, Agnifilo was unable to find any bank willing to process the Russian payment, nor any law firm who would be willing to take on VTB as a client.[18] Consequently, U.S. Magistrate Judge Gabriel Gorenstein granted Latham’s request to withdraw from the case. He said that without lawyers to defend it, VTB is now in default and the plaintiffs can request a default judgment against the Russian bank.[19]

Though White & Case was able to exit the Schansman New York federal case, the firm must continue its defense of Russia in a Washington, D.C. federal court lawsuit brought by shareholders of the defunct oil company Yukos seeking to enforce a $50 billion judgment against the country.[20] Andrey Kondakov, director general of the International Centre for Legal Protection, an independent body created to defend Russia in complex litigation, said in an affidavit that he communicated to White & Case that Russia would oppose efforts by the firm to withdraw from the case because it “would have a material adverse effect” on the country’s interests.[21]

Legal ethicists like UCLA School of Law professor Scott Cummings say that law firms should drop Kremlin-associated clients “because it’s the right thing to do,” and “even when representation is legal, that doesn’t mean it’s right.”[22] On the other end, ArentFox Schiff LLP attorney Matthew Tuchband, who spent 21 years at the Office of Foreign Asset Control’s Office of the Chief Counsel, makes an important point that cutting off legal representation would run afoul of the purpose of sanctions: “They’re meant to change behavior, not just to punish, though punishment sometimes is a way of encouraging future behavior to be different. The idea of sanctions is that they’re supposed to work and go away.”[23]

As VTB, a highly sanctioned entity, searched for months for new U.S. legal representation to no avail, Marc Agnifilo of Brafman & Associates made a powerful point about the nature of our legal system: the family of Quinn Schansman deserves to have its claims resolved. Few governments have created statutes such as the Antiterrorism Act, which allow foreign entities to be hailed into U.S. courts and potentially be held accountable for international crimes. While such statutes are often criticized for a multitude of reasons, namely the potential risk the U.S. and its diplomats might face if similar laws were adopted by other countries, most legislators, Democrat and Republican alike, have supported and passed legislation to help strengthen such statutes. As recently as 2016, the Justice Against Sponsors of Terrorism Act passed the Senate and House of Representatives with no opposition. While New York-based and international firms may be vilified for their continued representation of Kremlin-backed clients, and the lawyers at Wilk Auslander will likely face heavy criticism for their representation of Sberbank, the practice of law is not all about optics. If behind-the-scenes international entities continue to pour money into Russian coffers that will ultimately be used to fund the war in Ukraine, law firms withdrawing their representation from Russian clients in cases circulating through U.S. courts could ultimately allow for victims’ recovery to be a merely symbolic show of support. Right now, Ukraine needs much more than symbolic shows of support.

Alyssa N. Grzesh is a New York-based commercial litigator, serving as counsel to Harwood Law and Borstein Turkel. She is vice president of the Jewish Lawyers Guild and director of programming at the American Association of Jewish Lawyers and Jurists (AAJLJ). She previously served as executive director of the AAJLJ, with whom she worked on an amicus brief on behalf of Jewish organizations and allies, as amici curiae, in support of a petition for cert in Weiss et al. v. National Westminster Bank PLC. She also worked with the AAJLJ and a team of lawyers on amici briefs filed in the U.S. Supreme Court in support of Holocaust restitution plaintiffs.

This article appears in a forthcoming issue of NYLitigator, a publication of the Commercial and Federal Litigation Section. For more information, please see the Section page at NYSBA.ORG/COMFED.

[1] Holly Barker, Lawyers’ Obligations to Russian Clients Could Become Untenable, Bloomberg Law, March 22, 2022, https://news.bloomberglaw.com/us-law-week/lawyers-obligations-to-russian-clients-could-become-untenable.

[2][2] Kate Beioley, Lawyers Cut Ties With Kremlin-Linked Clients as Reputational Risks Mount, Financial Times, March 5, 2022, https://www.ft.com/content/5ca32b8c-7e29-4a91-8854-0660e5a2891e.

[3] Karen Sloan, Harvard, Stanford, Yale Law Project Monitors Law Firms’ Russia Pledges, Reuters, March 17, 2022), https://www.reuters.com/legal/legalindustry/harvard-stanford-yale-law-project-monitors-law-firms-russia-pledges-2022-03-17.

[4] Michelle Nichols, Family of American Killed in Downed MH17 Jet Sues Russia Banks, Money-Transfer Firms, Reuters, April 4, 2019, https://www.reuters.com/article/ukraine-crisis-mh17-usa/family-of-american-killed-in-downed-mh17-jet-sues-russia-banks-money-transfer-firms-idINL1N21L0W4.

[5] Id.

[6] Id.

[7] Id.

[8] Jacqueline Thomsen, Banks Shun U.S. Law Firm Trying To Represent Russian Lender VTB, Reuters, July 22, 2022), https://www.reuters.com/legal/legalindustry/banks-shun-us-law-firm-trying-represent-russian-lender-vtb-2022-07-22.

[9] Id.

[10] Id.

[11] Marcus Lu, A Recent History of U.S. Sanctions on Russia, Visual Capitalist, March 17, 2022, https://www.visualcapitalist.com/history-us-sanctions-on-russia.

[12] Reuters Staff, Key Facts About Sanctioned Russian Bank VTB, Reuters, Feb. 24, 2022, https://www.reuters.com/article/ukraine-crisis-bank-vtb/factbox-key-facts-about-sanctioned-russian-bank-vtb-idUSL1N2UZ3MI.

[13] Aaron Timms, Russia’s VTB Capital Brings Its Global Ambitions to New York, Institutional Investor, April 11, 2013, https://www.institutionalinvestor.com/article/b14zbd0n62kl3p/russias-vtb-capital-brings-its-global-ambitions-to-new-york.

[14] Kenneth Rapoza, Russian Bank Heads to New York, Forbes, Oct. 12, 2011, https://www.forbes.com/sites/kenrapoza/2011/10/12/russian-bank-heads-to-new-york.

[15] Key Facts About Sanctioned Russian Bank VTB, supra note 12.

[16] Press Release, U.S. Department of the Treasury, U.S. Treasury Announces Unprecedented & Expansive Sanctions Against Russia, Imposing Swift and Severe Economic Costs, Feb. 24, 2022.

[17] Thomsen, supra note 8.

[18] Id.

[19] Jacqueline Thomsen, Russia’s VTB Bank Found in Default in U.S. Lawsuit Over Downed Airliner, Reuters, Aug. 24, 2022, https://www.reuters.com/legal/transactional/russias-vtb-bank-found-default-us-lawsuit-over-downed-airliner-2022-08-24.

[20] Jacqueline Thomsen, Russia Says U.S. Law Firm White & Case Can’t Walk Away From Yukos Case, Reuters, July 14, 2022, https://www.reuters.com/legal/legalindustry/russia-says-us-law-firm-white-case-cant-walk-away-yukos-case-2022-07-14.

[21] Id.

[22] Cara Bayles, Firms Struggle With Ethics of Repping Sanctioned Russians, Law360, March 29, 2022, https://www.law360.com/pulse/articles/1478615/firms-struggle-with-ethics-of-repping-sanctioned-russians.

[23] Id.