Bankrupty Trustee Challenges Law Firm

LOS ANGELES (CN) - A bankruptcy trustee is challenging some of the legal fees paid to national law firm O'Melveny & Myers in its representation of a boutique investment business and its owner, saying the law firm's "scorched earth" tactics hurt the business creditors.

The bankruptcy trustee said in his filing in U.S. District Court in Los Angeles that O'Melveny billed and collected from Aletheia Research and Management Inc. $9.7 million, of which $4.1 represented legal fees to O'Melveny.

The trustee also named the firm of Freedman & Taitelman as a defendant in the case, over a much lesser $63,000 bill.

The two law firms represented both Aletheia owner Peter J. Eichler Jr.and the business itself, which the trustee claims is a conflict of interest.

"In failing to properly address the conflict issue, the defendants, guided by their own economic self-interest, breached their fiduciary obligations owed to the debtor, including among other things, their duty of loyalty," says the suit filed earlier this month.

"In the process, the defendants implemented a litigation strategy that favored Eichler over the interests of the debtor, a strategy that eventually led to the debtor's insolvency and other damages," said the suit by Chapter 7 Trustee Jeffrey Golden.

O'Melveny partner Steve Olson said the trustee's claims are inconsistent with effective representation of a client in widespread litigation.

He told Courthouse News that his firm had not been served with the trustee's complaint but denied the substance of the claims.

"The bankruptcy trustee's eleventh-hour claim against us and our colleagues is completely inconsistent with the effective representation we provided to each of our clients; a representation that met the most exacting professional standards," Olson wrote in an email.

The trustee's plea seeks to avoid transfers amounting to roughly $2.6 million.

According to the lawsuit, the collapse of Eichler's boutique investment firm came after a "bitterly fought" legal battle with Proctor Investment Managers, over 2006 agreements in Proctor's acquisition of a 10 percent stake in the company for $16 million.

The lawsuit claims that for three years O'Melveny & Myers used "scorched earth" tactics at Eichler's direction to delay the Proctor litigation in New York and Los Angeles courts.

"The parties produced over 130,000 documents totaling three-quarters of a million pages and 14 individuals were deposed over the course of 28 days. More than 20 motions were filed (many relating to discovery disputes) and nine separate hearings were held before the court or a referee whom the court was appointed to address discovery issues," the 27-page complaint states.

Golden says the two law firms knew that Aletheia was liable for more than $16 million.

During the legal battle, said the trustee, Eichler looted the company he co-founded in 1997 of more than $1.5 million.

A month after Aletheia filed for voluntary bankruptcy in 2012, the Securities and Exchange Commission accused Eichler and the firm of " cherry-picking " winning trades for their own trading accounts and certain clients. At the same time, the SEC alleged, Aletheia placed losing trades in two hedge funds, damaging investors in those funds.

After concluding that Proctor would probably prevail on its claim that Aletheia had breached the parties' agreements, and was liable for $45 million in damages, the bankruptcy trustee settled the case for almost $21 million, according to the complaint. The settlement was approved on May 5.

Trustee Golden is represented by Jerrold L. Bregman of Erza Brutzkus Gubner of Woodland Hills.

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