“Talcum Law Firm Accuses Litigation Funders of ‘Pirating’ Cases” —

• “A Mississippi-based plaintiffs’ firm accused three large investment firms of fraudulently inducing it to enter into two loan agreements on false grounds for talcum powder litigation. The Smith Law Firm filed suit Wednesday [2/11] against Ellington Financial, ICG Investments, and Stifel Financial alleging that funders misrepresented the availability of funds for a second tranche of a multi-million-dollar loan and conspired to gain control of the firm and its talcum powder litigation.”
• “‘The Defendants have executed what is commonly referred to as a ‘loan to own’ scheme,’ counsel for Smith Law firm at Carner & Rosemon wrote in the amended complaint filed in US District Court for the Southern District of Mississippi. ‘From the outset the Defendants conspired to defraud SLF knowing that this fraud would most likely result in SLF defaulting on its SLF1 loan interest payments and quarterly talc expenses which would allow the Defendants to pirate the SLF case fees.'”
• “According to the complaint, the three institutions provided loans to the firm for ‘tens of millions of dollars.’ The loans funded the law firm’s operations and supported the firm’s involvement in long-running litigation against Johnson & Johnson alleging its baby powder was tainted with cancer-causing asbestos. Smith Law says it brought the first case that went to trial in South Dakota in 2009. J&J denies allegations that its talc products caused cancer.”
• “It is now a multi-district litigation and faces more than 73,000 suits from consumers who blame baby powder for their cancers.”
• “After the talcum powder litigation was delayed by multiple bankruptcies filed by Johnson & Johnson, Smith Law says it submitted a request to draw on the second portion of the loan, around $30 million, but was denied. The firm could not meet its required cash interest payments due on the first loan and was put in default, they wrote in the complaint.”
• “Smith Law further alleged that the funders only included the $30 million tranche to artificially increase the overall size of the loan so it could be placed in a Collateralized Loan Obligation, which is a structured security that bundles lower-rated corporate loans and sells them to investors.”
• “The three investment firms manage billions of dollars and litigation finance is only a portion of their portfolio. Stifel is a global wealth management and investment banking company that manages over $550 billion in client assets. ICG is an alternative asset manager with $127 billion in assets under management. Ellington acquires and manages mortgage-related, consumer-related and corporate -related financial assets and has $18.2 billion in assets under management.”

“How to buy a law firm if you’re not allowed to buy a law firm” —

• “When Cohen & Gresser, known for defending white-collar criminals such as Sam Bankman-Fried and Ghislaine Maxwell, hired bankers to sell a stake in itself to private equity, it turned heads in the US legal profession. Outside investors are barred from owning law firms in most US states, including New York where Cohen & Gresser is based, under professional ethics rules designed to prevent commercial considerations from tainting legal advice.”
• “The complex financial structure that provides private equity with a workaround is inevitably coming to law, Larry Gresser said, and he wants the law firm he co-founded to be the most prominent so far to snag a deal from a buyout group.”
• “‘This is a moment of both uncertainty and opportunity,’ he told the FT. ‘One major benefit of the new structure is that the law firm can offer partners equity that will increase in value as the enterprise grows, thereby encouraging partners to think and act in the longer-term interest of the firm.'”
• “So, how exactly can you buy a law firm if you are not allowed to buy a law firm? The answer is that the law firm gets split into two parts: one entity, fully controlled by lawyers, that provides legal advice to clients, and a second, called a management services organisation, that houses technology and other back-office assets and all the non-lawyer staff.”
• “The MSO sells services back to the other side of the business in exchange for fees that are large enough to make the entity profitable, and it is the MSO that sells an ownership stake to private equity. That way, private equity does not fall foul of the American Bar Association’s Rule 5.4, which says non-lawyers cannot be in the business of law and firms cannot share fees with non-lawyers.”
  A diagram showing how institutional investors and law firm partners invest through a management services organisation, which provides services to a separate law firm under a services agreement.”
• “‘Investors are trying to fine-tune the structure and get a handle on what exactly constitutes legal work,’ said Austin Maloney, a lawyer at Hunton Andrews Kurth, which advises private equity. ‘The goal is to perform as many services as possible in the MSO. No investor is going to sign up to this if they can’t get the right amount of juice out of it.'”
• “The MSO structure has been used by a handful of small US firms over the past 20 years, and concentrated in those specialising in personal injury cases, but interest has exploded in recent months. There appear to be several reasons. Private equity has swept through the US accounting sector in the past five years, leaving law the last frontier in professional services.”
• “Private equity and their advisers are beginning to get confident about extracting significant amounts of a law firm’s value by shifting more assets into the MSO, potentially expanding the number of firms that could make a deal add up.”
• “‘We ask, how much does an outsourced marketing firm charge? An IT service provider? We iterate and iterate until the economics and the ethics align,’ he said. ‘The brand licensing is the big variable. If Kirkland & Ellis were ever to do this, how much of its value is in the brand? Is it 10 per cent? Or 20 per cent? It’s an interesting question, right?'”
• “It remains unclear what different state bar associations might think about all the potential variations — one reason major private equity firms are treading warily, and advisers caution the explosion of interest may not ultimately translate into deals. There is also a potential complication from draft legislation under consideration in Illinois, which would ban MSOs from directly and ‘indirectly’ sharing fees.”

“How Private Equity Is Challenging the Traditional Future of Law Firm Ownership” —

• “Advocates argue that small and mid-sized law firms often lack capital for technology, expansion, or operational improvements. Outside investors can address this gap and introduce operational discipline from other industries. Some also note generational shifts: younger lawyers with higher debt and fewer partnership opportunities may prefer stable employment models over traditional equity tracks, though this may reflect limited options rather than true preference.”
• “Skeptics raise significant concerns. Private equity firms typically operate on holding periods of three to seven years, which may conflict with the long-term relationships and reputational investments essential to successful practices. There are questions about the impact on client relationships and firm culture when owners prioritize exit strategies.”
• “The healthcare sector provides a cautionary example. Research has linked private equity ownership to increased costs, higher complication rates, and reduced staffing levels. A 2023 JAMA study found that private equity acquisition of hospitals was associated with a 25% increase in hospital-acquired adverse events. While legal services differ from healthcare, the tendency to prioritize short-term gains over service quality is a relevant consideration.”
• “Questions about who benefits from efficiency gains also deserve attention. If an MSO reduces costs but maintains the same charges, the savings are distributed to investors rather than partners or clients. Separating operations from the firm also complicates data protection, conflict checks, and regulatory compliance. The UK experience included notable ABS failures that required regulatory intervention.”

“Ex-client sues law firm King & Spalding for $1 billion over alleged malpractice” —

• “U.S. law firm King & Spalding and one of its former partners are facing a $1 billion legal malpractice lawsuit over allegations that they tried to wrest the ownership of a health care-based investment fund away from its client.”
• “White Oak Global Advisors alleged in a complaint, filed Saturday in New York County Supreme Court that former King & Spalding partner Terry Novetsky worked against its interests by secretly helping Isaac Soleimani, the then-CEO of White Oak’s health care-based fund.”
• “The lawsuit alleges that Novetsky and the law firm, while representing White Oak Global Advisors and White Oak Healthcare, worked with Soleimani ‘to craft and execute a multi-step plot to usurp control of White Oak Healthcare,’ including creating ‘pretextual litigation’ on Soleimani’s behalf. White Oak alleged that Novetsky and Soleimani communicated with each other through their personal Gmail accounts.”
• ‘The paper trail is damning,’ White Oak said in its lawsuit. It said King & Spalding’s malpractice caused it to suffer hundreds of millions of dollars in damages, as it prohibited White Oak from launching two multi-billion dollar health care funds.”
• “A spokesperson for King & Spalding did not immediately respond to a request for comment. White Oak said in its lawsuit that Terry Novetsky left King & Spalding for an unnamed law firm in 2023, where Novetsky continued the scheme. Novetsky did not immediately respond to a request for comment. The other law firm was not named in the lawsuit.”
• “White Oak said it is seeking at least $1 billion in damages, including at least $500 million in punitive damages. King & Spalding engaged ‘in an unprecedented conflict of interest and breach of fiduciary duty toward its clients,’ White Oak’s law firm Kasowitz said in a statement.”
• Full complaint: here.