How an O'Melveny discovery sleuth saved the day

(Reuters) - In the hierarchy of plum legal work, with, say, arguing before the U.S. Supreme Court at the top, then document review has got to be scraping the bottom.

“Mind numbing” is a phrase that comes to mind. Little wonder firms often outsource the work or use AI to help manage reviews.

But here’s an inspiring tale for those toiling away in the e-trenches: a discovery sleuth who struck gold, unraveling a billion-dollar case with just two words buried in an innocuous document.

Take a bow, O’Melveny & Myers counsel Megan Smith. Or possibly a nap. She just had a baby and is out on maternity leave, which is why she wasn’t available for comment. But partner David Marroso walked me through the extraordinary saga pitting the firm’s client, home construction giant Lennar Corp, against California real estate developer Nicolas Marsch III.

Marsch is represented by Robert Barnes of Barnes Law, known for defending clients including Alex Jones and Infowars against lawsuits by Sandy Hook parents and Kyle Rittenhouse, the teenager charged with fatally shooting two people during protests in Wisconsin last year.

Barnes in an email described Marsch’s latest loss before the 3rd Circuit U.S. Court of Appeals, which was made final last month when the U.S. Supreme Court denied cert, as “more political cover-up than competent legal analysis.”

“Of course, the fact two of the former (California) Attorney Generals (sic) who showed such little interest in the case, and often overtly obstructed it by their inexplicable legal maneuverings, are now Vice President and the Secretary of Health and Human Services might explain things a bit,” he wrote.

Or it might be that his client shot himself in the foot with (of all things) a change of counsel form – and that the eagle-eyed Smith realized what it signified.

To understand why this was a critical turning point, it’s necessary to back up about 25 years. That’s when Lennar and Marsch’s company, Briarwood Capital, teamed up to develop the Bridges at Rancho Santa Fe, a posh enclave of multi-million-dollar homes near San Diego. ("Imagine a private retreat, nestled among the citrus groves, rolling foothills and lush fairways of Southern California," its website states.)

Relations between Lennar and Marsch soured, and litigation in San Diego County Superior Court ensued. “It began as a regular commercial dispute,” O’Melveny’s Marroso told me, with claims and counterclaims including breach of contract and breach of fiduciary duty.

Represented by O'Melveny, Lennar came out on top in 2011 with a $60 million award that included attorneys’ fees.

None of this strikes me as very remarkable or, quite frankly, very interesting. But it wasn’t the end. More like the beginning.

According to Marroso, Marsch hired Barry Minkow to investigate Lennar, looking for leverage to use against his ex-partner.

Minkow has quite a backstory of his own. In 1998 at age 21, he was convicted of stock fraud in connection with his ZZZZ Best carpet cleaning business and spent seven years in federal prison. After he was released, he became a pastor and founded the Fraud Discovery Institute in San Diego, with a mission to uncover corporate fraud.

His apparent redemption proved short-lived.

In early 2009, Minkow released a report accusing Lennar of massive accounting irregularities and fraud. Lennar’s stock plummeted, erasing more than $500 million in company value.

Crying foul, the Florida-based home builder turned again to O’Melveny, suing Marsch and Minkow in Miami-Dade County Circuit Court for alleged extortion and defamation.

The feds got involved as well, charging Minkow with securities fraud. According to the Justice Department, “unbeknownst to the public, Minkow shorted Lennar stock in advance of the issuance of his report” and made “false and misleading statements about Lennar’s business operations and management.”

Minkow pleaded guilty in 2011 and was sentenced to five years in prison. He was also ordered to pay $583.5 million in restitution to Lennar. (Good luck collecting, considering that in 2014 Minkow got another five-year prison sentence, this time, per DOJ for “embezzling more than $3 million from his own parishioners.”)

Repped by Marroso plus O'Melveny partner Daniel Petrocelli, Lennar went on to win its civil suit against Marsch by default, scoring an eye-popping $1 billion jury verdict. The award was upheld on appeal in 2015, when the Florida Court of Appeal pointed to Marsch’s “numerous willful discovery violations, which included the deletion of relevant emails, the concealment of material witnesses, lying during depositions, providing false testimony before the trial court, and much more.”

Surely now the fight was over?

“We thought it was done,” Marroso said. But he likened Marsch to Arnold Schwarzenegger’s unstoppable sci-fi robot. “He’s like a litigation Terminator.”

In 2017, a mysterious, Wyoming-based entity called Citizens Against Corporate Crime filed a qui tam action in California state court against Lennar, citing an “unconscionable scheme to swindle the nation's largest public pension fund, CalPERS, in the approximate amount of $970 million dollars.”

Over more than 100 pages, the complaint alleged a complex scam involving a now-bankrupt Lennar entity called LandSource Communities Development LLC that included “the use of inflated appraisals, false cash flow projections, and material misrepresentations and misstatements.”

Lennar learned of the complaint when it was unsealed in 2018 after the state of California declined to intervene.

So who the heck was Citizens Against Corporate Crime, or CACC?

“We immediately looked and said, ‘This is Marsch,’” Marroso said. “But of course, there was no proof.”

Whistleblower identifies are protected in qui tam complaints, and a search of Wyoming public records revealed nothing.

Marroso figured they’d probably have been able to ferret out who was behind CACC a year or two down the road in discovery. But Smith saved them the trouble.

In a small file of unsealed qui tam documents, she noticed an attorney substitution form filed by Barnes on Dec. 12, 2017, to add another attorney from his firm to the case.

The form bore three signatures – and one of them was Marsch’s.

It was enough to damn the case. That’s because when LandSource went through Chapter 11 proceedings in Delaware Bankruptcy Court in 2008, Marsch and his company Briarwood were members of the creditors committee.

The committee negotiated a deal with Lennar, which included a broad release and waiver of “any and all claims ... or liabilities whatsoever” related to LandSource.

O’Melveny bankruptcy partner Evan Jones promptly went back to the Delaware court and convinced it to enjoin Marsch and CACC from pursuing the qui tam suit based on that 2008 release.

The 3rd Circuit in December upheld the decision, writing that “the essential premise of CACC’s and Marsch’s argument is meritless.”

Marsch gave it one last try with an appeal to the U.S. Supreme Court, which in June declined to take up the case.

Is the Marsch/Lennar war really over? Who knows?

But if there’s a lesson, Marroso said, it’s that being embedded with Lennar over so many years of litigation taught them to follow their instincts and “don’t take shortcuts.”

He compared Smith’s discovery to “finding a needle in a haystack – but we knew what the needle looked like.”

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