Report Says Heller Inflated Profits to Retain Partners, Seeks $106M from Lawyers
Updated: Partners in the failed law firm Heller Ehrman will have to cough up $106 million in money distributed to partners in 2007 and 2008 if unsecured creditors in the firm’s bankruptcy get their way.
A critical report (PDF posted by Legal Pad) of the law firm’s operations by a committee of the unsecured creditors asserts that the estate has valid claims to the money. The report says the law firm had unpaid expenses and a decline in profits in 2007, yet accountants were ordered to distribute $9 million to partners above and beyond profits for the year.
The report claims Heller was attempting to boost its 2007 business numbers in an effort to retain partners. The law firm was experiencing financial difficulties that year, after several of its major cases were settled or dismissed and key partners began leaving.
A Recorder story on the report emphasizes the alleged cover-up of the $9 million distribution. “Some pretty shady stuff was going on at Heller last year, if a new report in the bankruptcy court is to be believed,” the story says.
The $9 million was to be booked as “shareholder loans” but an accountant was not allowed to send acknowledgements of the loans, the report asserts. “The committee believes that the facts will demonstrate that by December of 2007, Heller LLP was using creditors’ funds to overpay shareholders instead of observing its duty to make timely payments to its creditors and properly reserve funds for its operations,” the court document says.
Former Heller chairman Matthew Larrabee told the Recorder that the claims are without merit and “will be vigorously defended at the appropriate time.”
The report, which cautions it is based on preliminary information, says Heller embarked on a growth strategy in 2003 that had failed by 2007. Its problems were compounded by an ownership structure in which the law firm was owned by several corporations that were in turn owned by the shareholder lawyers. This structure forced the firm to distribute all of its earnings at the end of each calendar year to avoid double taxation of income.
Heller’s heavy reliance on credit also increased the risk of insolvency, the report says. The firm’s total reliance on a single line of credit from Bank of America and affiliated entities further increased the risk of having credit cut off.
Heller paid the $9 million to shareholders, even as it changed prior practices and did not prepay expenses in December 2007 and stopped paying valid claims to creditors two months before, according to the report. The firm also borrowed $15 million from its 2008 projected revenues in a strategy of robbing Peter to pay Paul, the report alleges.
A total of $74 million was distributed in annual bonuses to partners in December 2007, $24 million was paid to pension plans in 2008, and $8 million was paid to departing partners in the lead up to the firm’s dissolution, the report says. It asserts the $106 million should be recovered under fraudulent conveyance statutes.
Updated on Aug. 12 to include Larrabee’s statement.
