Investment firm bankruptcy returns to malpractice issue

The trustee for a defunct investment firm in California is accusing a law firm, O’Melveny and Myers, of legal malpractice. The trustee is urging a judge to set aside an arbitration award that found that the firm did not commit malpractice while it represented the investment company, Aletheia Reseach and Management. The company’s estate trustee for its bankruptcy filing says that the large law firm left the investment company with millions of dollars in losses as a result of alleged errors and misconduct during its representation. In particular, the trustee alleges that joint representation of the company and its founders created a damaging conflict of interest.

Experts note that the trustee will face a difficult battle in attempting to convince a judge to overturn the arbitration award. The arbitrator determined that the firm did not violate conflict of interest rules when it defended both the founders and Aletheia in a lawsuit by another investment company between 2009 and 2012. The other firm, which owned a 10% share of Aletheia, accused the founders of enriching themselves by “fleecing” Aletheia through excessive compensation. While Aletheia later settled the case and agreed to pay the other firm over $21 million, it then filed for bankruptcy protection in 2012.

Because the role of a bankruptcy trustee is to recover funds for the creditors of the bankrupt firm, the trustee attempts to gather all available money. In this case, the trustee says that if the law firm did not jointly represent the parties, the bankrupt firm would have millions more available to pay off those debts.

Lawyers have a responsibility to represent their clients under standards of professional responsibility, avoiding conflicts of interest and other forms of misconduct. People or businesses who believe they are victims of legal malpractice can consult with an attorney about their options to pursue compensation.