Risk Update

Law Firm Conflicts News — Earplug Bankruptcy Conflict Cleared (With a Catch), Whistleblower Conflict Called, Private Equity/Finance/Auction Conflicts Management

Texas Doc Claims Atty Had Conflict In Whistleblower Case” —

  • “A Texas doctor who was hit with a judgment of more than $2.5 million is claiming in a new lawsuit that his interests were in conflict with other defendants also represented by his former lawyer, who is now a senior counsel with Clark Hill PLC.”
  • “Dr. Emelike Agomo alleges that Lara Maria Longo, formerly Lara Maria Silva of the Silva Law Firm, should not have represented him while also representing his then-employer Outreach Eye Care because he was a salaried employee who had little to do with the fraudulent billing that led to the multimillion-dollar judgment for False Claims Act violations in the Southern District of Texas.”
  • “In the complaint filed Friday in a Texas district court in Harris County, Agomo claims Longo is guilty of malpractice and breach of fiduciary duty.”
  • “U.S. District Judge Lynn N. Hughes found Agomo and the owner of Outreach Eye Care, Dr. Mustapha Kibirige, liable for wrongful billing to Medicare for glaucoma testing in an order granting partial summary judgment in March 2020. The relator in the whistleblower suit is an optometrist who alleged that he repeatedly told Agomo, the clinic’s former medical director, that the procedure they were billing for wasn’t authorized under the medical code they were using and which resulted in fraudulently obtained payments from Medicare.”
  • “Agomo said Longo’s representation fell below acceptable standards for attorneys when she took him on as a client along with co-defendants whose interests were in conflict with his and when she failed to ‘disclose and inform’ him of the conflict.”
  • “Agomo further faults Longo for keeping him ‘entangled’ with his former employer and for ‘failing to withdraw as soon as she came to the knowledge that the plaintiffs in the underlying action sought to nail Dr. Agomo with a humongous judgment along with the other co-defendants.'”

Law firm Kirkland cleared to represent bankrupt 3M earplug subsidiary” —

  • “A U.S. bankruptcy judge on Thursday allowed Kirkland & Ellis to continue representing bankrupt 3M subsidiary Aearo Technologies, rejecting calls to disqualify the firm because of its work defending 3M in a massive litigation over allegedly defective military earplugs.”
  • “U.S. Bankruptcy Judge Jeffrey Graham in Indianapolis said that Aearo and 3M do not have conflicting interests, as both companies are working to reach a bankruptcy settlement that would resolve more than 200,000 lawsuits they are facing alleging that 3M’s earplugs contributed to veterans’ hearing loss.”
  • “A conflict could arise in the future, if, for example, Aearo and 3M disagreed about the terms of a future settlement, Graham said. If that happened, Kirkland could face disqualification, loss of fees, or even potentially the dismissal of Aearo’s bankruptcy case, according to the judge.”
  • “‘Kirkland & Ellis is navigating a minefield,’ Graham said. ‘This isn’t a blanket endorsement saying that K&E is in the driver’s seat no matter what happens in the future.'”
  • “Kirkland’s Mark McKane told Graham that his firm’s deep knowledge of the earplug litigation would benefit Aearo’s restructuring effort, and that the firm had put guardrails in place to prevent future conflicts from derailing the case.”
  • “Kirkland has defended 3M in the MDL, and it represents Aearo in the bankruptcy case that was meant to spur a settlement of the earplug lawsuits. Aearo’s bankruptcy filing failed to pause the lawsuits against 3M, and the bankruptcy is proceeding in parallel with consolidated litigation in Florida federal court.”
  • “The plaintiffs and the U.S. Department of Justice’s bankruptcy watchdog sought to disqualify Kirkland from representing Aearo in the bankruptcy, saying it could not faithfully serve both Aearo and 3M.”

Managing and mitigating conflicts of interests in GP-led transactions” —

  • “GP-led secondary transactions enable a sponsor or general partner (GP) to manage one or more existing assets in a newly formed fund capitalized by new investors through a fund restructuring. These transactions are often proffered as a win-win-win — for GPs, investors and buyers — but as the market continues to expand against a backdrop of increased regulatory scrutiny, navigating the conflicts of interests has become increasingly important. This article explores key considerations in managing conflicts of interests in GP-led transactions.”
  • “GP-led transactions present an inherent conflict of interest due to the GP’s position as both seller and buyer… To further complicate the web of conflicts, GPs may offer co-investment or staple investment opportunities for other funds managed by the GP as part of the transaction.”
  • “One of the first steps a GP should take in mitigating conflicts is to survey the governing documents relevant to the existing fund, including the operating agreements, side letters, offering documents, other fund documents and underlying asset documents. These documents may contain provisions concerning restrictions, rights and obligations relevant to the transaction, including clawback obligations, consent requirements, rights of first refusal and tag and drag rights.”
  • “Legal diligence of the fund documents can also unveil whether amendments will be required and provide guidance on the voting requirements for the limited partner advisory committee (LPAC).”
  • “An important role of the LPAC in any private fund is to advise on conflicts for related-party transactions. As such, another important early step in managing conflicts is engaging the LPAC to ultimately obtain its waiver of any conflict.”
  • “Many GPs approach the LPAC for informal approval in the early stages of exploring a transaction before the sale process is actually initiated and then obtain formal approval once bids from prospective buyers are received.”
  • “Certain LPAC members may need to recuse themselves from the formal approval if their institution intends to participate as a prospective buyer. While the LPAC is not charged with approving the terms or price of the transaction, full and fair disclosure of all material terms of the transaction and potential conflicts of interests is essential.”
  • “The LPAC will want to understand why the proposed transaction is the best option for existing investors and what price discovery methods the GP intends to employ. In some instances, the LPAC may request a fairness opinion or third-party valuation.”
  • “A fairness opinion is produced by an independent opinion provider or valuation agent and opines on whether the price being offered is within a fair range. Typically, the opinion is accompanied by a valuation report focused on pricing the target assets. While fairness opinions are used to help mitigate conflicts of interest, they do not necessarily ensure the highest price and other price legitimization tools exist.”
  • “Recently, some GPs have coupled the GP-led auction process with a minority direct sale to a third party. If the GP ran a direct sale process to no avail or the price offered in connection with the GP-led sale process is better, these facts also help mitigate concerns around conflicts of interest with respect to price.”
  • “Offering existing investors the opportunity to roll on the same economic terms and conditions as the existing fund (a ‘status quo’ option) can also mitigate conflicts of interest.”
  • “In order to successfully navigate the conflicts of interest present in GP-led transactions, GPs must carefully consider the various mitigation tools available and tailor their approach based on the specific conflicts present.”