October 12, 2009 1:29 PM

Heller Creditors to Go After Partners and Accountants?

Posted by Zach Lowe

A midnight filing in the Heller Ehrman bankruptcy case last week sheds new light on just how far the firm's creditors may go to recoup money from ex-partners--and how close Heller may have been to a life-saving merger with Baker & McKenzie. 

In the filing, Heller's creditors committee outlines a liquidation plan that may involve several lawsuits, including possibly suing the firm's former accountants at Ernst & Young, according to the Recorder, an Am Law Daily sibling publication. 

The creditors allege that Ernst & Young failed to sound the alarm in 2007, when its auditors found an $11 million financial irregularity in the firm's finances. The creditors committee had previously alleged that the firm overpaid its partners by $9 million to create the impression that the firm was more stable than it actually was. 

The committee now believes the "thinly disguised" plan involved $11 million in improper payments and that Ernst & Young auditors raised questions about it but eventually let it slide after cajoling from Heller higher-ups. 

Heller's ex-chair, Matthew Larrabee, has denied the false-profits allegations. But the liquidation plan says lawyers doing due diligence for Baker & McKenzie regarding a possible merger with Heller noticed the overpayments and asked about them, the Recorder says. Baker backed out of the merger partly because Heller could not adequately explain the alleged overpayments, which were listed as "shareholder loans." 

The rest of the liquidation plan confirms several prior Recorder reports about possible litigation targets, including 14 ex-Heller lawyers who bolted for Covington & Burling, a move that sunk Heller; other Heller partners who allegedly took pending business with them to their new firms; and Greenberg Traurig, Heller's restructuring adviser. 

According to the creditors, Greenberg lawyers missed the fact that Bank of America's loans to Heller were not secured, meaning the firm could have used the $50 million it immediately repaid the bank to satisfy secured creditors. 

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