On The Case

O’Melveny defeats conflict allegations in trial court; trustee for ex-client vows appeal

O’Melveny & Myers and its lawyers at Gibson Dunn & Crutcher got a big win last week from U.S. District Judge Christina Snyder of Los Angeles in a case involving O’Melveny’s onetime client Aletheia. A bankruptcy trustee for Aletheia, an investment manager once entrusted with more than $2 billion in assets, had brought malpractice and breach of duty claims against O’Melveny, asserting that the law firm failed Aletheia by simultaneously representing the company and its CEO in litigation alleging misconduct by the CEO. In August, an arbitrator rejected the Aletheia trustee’s claims. Judge Snyder’s painstaking and methodical Nov. 1 opinion (O’Melveny defeats conflict allegations in trial court; trustee for ex-client vows appeal) confirmed the arbitrator’s decision, concluding that the trustee’s lawyers at Brutzkus Gubner provided her with no justification to vacate the arbitrator’s award.

O’Melveny’s lead counsel, Kevin Rosen of Gibson Dunn, said in an email statement that he and his client were gratified that Judge Snyder confirmed the arbitrator’s conclusion “that all of the trustee’s allegations against O’Melveny and its lawyers were meritless.”

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But this case isn’t over yet. Trustee counsel Jason Komorsky of Brutzkus told me his client intends to appeal Judge Snyder’s ruling to the 9th U.S. Circuit Court of Appeals. The appeal, he said, will focus on the public policy implications of O’Melveny’s alleged conflict in representing both a corporation and a CEO accused of looting the company. O’Melveny counsel Rosen declined to comment on the trustee’s plans to appeal.

The trustee’s conflict allegation is at the heart of the case, although some coverage of the litigation in front of Judge Snyder has highlighted the easy-to-understand assertion that the arbitrator who exonerated O’Melveny, former federal judge Gary Feess, was biased because the case impacted the career prospects of his son. Feess’ son, a law student when the arbitration was under way, had signed up for on-campus interviews with O’Melveny and Gibson Dunn. When Aletheia’s trustee raised the issue of potential bias with Feess, both Gibson and O’Melveny told the arbitrator that they would refrain from hiring his son out of an abundance of caution.

The trustee’s lawyers told Judge Snyder that the firms’ refusal to hire Feess’ son could only have exacerbated any bias because the arbitrator would hold the firms’ actions against the trustee. Judge Snyder swatted away those arguments, concluding that the original interviews didn’t require Feess to recuse himself and that the trustee’s subsequent assertion that the arbitrator held a grudge was “unpersuasive.”

But the whole matter of the arbitrator’s son is a red herring. The more important issue in this case is whether O’Melveny betrayed Aletheia by representing both the company and its CEO in litigation in which another investment manager, Proctor, accused Aletheia of breaching a sales agreement.

It’s important to remember as you consider the complicated facts of this dispute that Feess, a retired federal judge, sided entirely with O’Melveny after a three-week hearing. And Judge Snyder rejected the trustee’s argument that Feess’ arbitration decision manifestly disregarded the law or contravened the public policy against conflicted representations. That said, the case raises tough questions.

Aletheia was formed in 1997 by a family lawyer and a onetime Bear Stearns asset manager, Peter Eichler. By 2006, the firm was managing more than $3.2 billion. That year, it reached an agreement with Proctor Investment Managers. Proctor acquired a 10 percent stake in Aletheia’s shares for $16 million and agreed to promote certain Aletheia financial products, in exchange for fees. Aletheia added Proctor’s CEO to its board. It also agreed to certain caps on compensation, bonuses and other distributions to employees, partners and shareholders.

By the end of 2007, both sides had soured on the deal. I’m skipping over a lot of history, but the critical fact is that Proctor accused Eichler and Aletheia’s cofounder of taking tens of millions of dollars more out of the company than they were due under the agreement they’d reached with Proctor. Proctor also blamed Aletheia’s board for allowing the allegedly improper payments.

Aletheia officials have always denied there was anything improper about their compensation. In 2010, Aletheia brought in O’Melveny – which had represented the asset manager in an unrelated investigation by the Securities and Exchange Commission – to handle its multi-pronged dispute with Proctor. In the central case between Aletheia and Proctor, which was litigated in Superior Court in Los Angeles, O’Melveny represented the company, Eichler and two other Aletheia board members.

The Proctor litigation was so expensive that in early 2012, O’Melveny recommended that Aletheia bring in less expensive counsel to handle it. (The company’s bankruptcy trustee later asserted that O’Melveny billed $4.1 million on the Proctor cases.) Investors, meanwhile, started pulling their money out of Aletheia’s management. In November 2012, Aletheia filed for bankruptcy.

The bankruptcy trustee, Jeffrey Golden, reached a settlement with Proctor, allowing a claim of $21 million. That deal made Proctor the biggest creditor in the bankruptcy, holding 60 percent of the allowed claims. (Significantly, Aletheia’s investors were paid back and are not creditors in the bankruptcy.)

In 2015, the trustee brought his case against O’Melveny, asserting that the law firm had acted against Aletheia’s interests because it was taking directions from Eichler. According to the trustee, O’Melveny knew that Eichler and other Aletheia board members had exposed the company to nearly $20 million in claims by Proctor, yet made a conscious decision to take direction from Eichler, to the detriment of the company.

O’Melveny’s position is that there was not conflict between the interests of Eichler and Aletheia during O’Melveny’s representation. Proctor was suing them both for breaching the 2006 agreement. Eichler and Aletheia were aligned against Proctor. The trustee alleged that Aletheia might have had its own claim against Eichler, but O’Melveny’s side said that assertion ignored the real-world reality that Eichler was Aletheia’s main attraction. At the arbitration hearing, O’Melveny presented testimony from a standard-of-care expert, John Spiegel of Munger Tolles & Olson, who emphasized the real-world business consequences that a board facing Aletheia’s challenges would face if it were to decide to sue its most important executive.

What makes this dispute particularly complicated is that Proctor wasn’t just the counterparty in a contract with Aletheia. It was also a shareholder. So Proctor could have brought derivative claims against Eichler and other Aletheia board members on behalf of the company. In fact, O’Melveny even posited an argument in one piece of the Proctor litigation that Proctor claims against two directors other than Eichler could only be asserted derivatively. But Proctor did not sue derivatively. It sued on its own behalf, asserting that all of the damages it alleged should flow only to Proctor, not to Aletheia.

Lawyers for the trustee said California proscribes conflicted representations regardless of the form of the allegations that give rise to the conflict. In other words, according to the trustee, it doesn’t matter that Proctor brought direct claims because its case contained allegations that were derivative in their nature.

That argument failed with the arbitrator, who rejected the trustee’s assertion of a conflict between the interests of Aletheia and its directors. It also failed with Judge Snyder. “Given Proctor’s own representations that any relief would flow to Proctor, rather than Aletheia, the arbitrator did not reach any conclusions that demonstrate an error of law, let alone manifest disregard of the law,” she wrote.

Judge Snyder said that the trustee’s argument that the arbitrator’s ruling must be set aside in the interest of California’s policy against conflicted representation pre-supposes that O’Melveny’s representation was conflicted. And because she rejected the trustee’s argument that the arbitrator reached a clearly erroneous conclusion that O’Melveny wasn’t conflicted, the public policy argument must fail as well.

Like I said, the trustee plans to appeal, so all of this could end up being fodder for the 9th Circuit.