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September 10, 2009 3:13 PM

K&L Gates Sued by Bankruptcy Trustee

Posted by Brian Baxter

UPDATE: Sept. 11, 11:00 a.m. Click here for a story on the suit against K&L Gates by sibling publication The Legal Intelligencer.

A bankruptcy trustee overseeing the liquidation of Le-Nature's is suing K&L Gates, former firm chairman Sanford Ferguson, and an accounting firm for malpractice for allegedly failing to detect a massive fraud at the bottled water company.

The Pittsburgh Tribune-Review first had the news of the suit, which was filed in state court in Pennsylvania. In the suit, bankruptcy trustee Marc Kirschner accuses the defendants of malpractice, negligence, breach of fiduciary duty, and negligent misrepresentation for failing to detect a fraud at Le-Nature's three years before the company was forced into Chapter 11 in November 2006.

In 2003 Le-Nature's board of directors retained K&L Gates, Ferguson, and Pittsburgh-based accounting firm Pascarella & Wiker to conduct an internal investigation after several high-ranking executives at the Latrobe, Pa.-based company resigned and accused former CEO Gregory Podlucky of fraud.

In the malpractice suit, Kirschner claims the internal investigation's report concluded that there was no evidence of fraud at Le-Nature's "despite a number of red flags."

Kroll Zolfo Cooper, a restructuring firm now known as Zolfo Cooper, later became custodian of Le-Nature's and put the company into bankruptcy. At the time, Kroll's lawyer, Kirkland & Ellis bankruptcy partner Paul Basta, told the Pittsburgh Post-Gazette that under Podlucky, Le-Nature's had reported annual revenues of $275 million when the actual number was more like $32 million.

"We're in a bit of a corporate governance mess," Basta told the paper. (Basta was not immediately available for comment.)

Subsequent media reports said Podlucky looted Le-Nature's for $500 million, including $1 million in corporate funds the former CEO tried to use to buy a pair of custom-made Harry Winston earrings. (Podlucky is under investigation by federal prosecutors.)

Shortly after filing for bankruptcy, Le-Nature's began liquidation proceedings to pay down $800 million in debt owed to creditors.

K&L Gates chairman Peter Kalis did not respond to a request for comment on the malpractice suit. Ferguson, a corporate governance partner, preceded Kalis as chairman of the firm from 1994 to 1997. In a statement to The Am Law Daily, K&L Gates denied the allegations.

"Mr. Kirschner's suit is his latest transparent attempt to search for an innocent deep pocket to pay for alleged losses claimed on behalf of the company that caused its own demise," the statement says. 

The firm said it was retained for a "limited engagement" by a special committee of Le-Nature's board of directors that concluded three years prior to the company entering bankruptcy. The firm also accused Kirschner of backpedaling from previous allegations that put the onus for the fraud on "Le-Nature's own senior officers and other employees."

Kirschner, who could not immediately be reached for comment, has also served as litigation trustee in the liquidation of Refco. In August a federal district court judge dismissed Kirscher's claims against Mayer Brown and two accounting firms that he was trying to hold liable for civil suits tied to the collapse of the commodities broker in 2005.

Jones Day is serving as counsel to Kirschner in Le-Nature's Chapter 11 case. Litigation partner Laura Ellsworth and bankruptcy partner Lisa Laukitis did not respond to requests for comment. (Kirschner is a former Jones Day partner.)

Bankruptcy boutique Pachulski Stang Ziehl & Jones is serving as bankruptcy counsel to the trustee. Partner Bruce Grohsgal in Wilmington declined a request for comment.

Lowenstein Sandler and David Rudov from Pittsburgh's Rudov & Stein are serving as counsel to Le-Nature's official committee of unsecured creditors. Rudov did not immediately respond to a request for comment.

Kramer Levin Naftalis & Frankel is representing an ad hoc committee of Le-Nature's senior subordinated noteholders.

The name of the case is Kirschner v. K&L Gates in Allegheny County Common Pleas Court.

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