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Orrick Fires Back in Thornburg Fraud Suit

Orrick, Herrington & Sutcliffe has fired back against accusations that the firm and a key partner helped orchestrate an alleged fraud at the bankrupt company Thornburg Mortgage, court records show. Orrick and partner Karen Dempsey filed a motion late Monday to dismiss a suit Thornburg's bankruptcy trustee filed accusing Dempsey of helping Thornburg executives siphon millions from their own company. Dempsey is Thornburg's longtime counsel and also served as the company's assistant secretary, according to the trustee's original complaint.

The case is enormously complex and involves allegations of misappropriated money, stolen laptops, missing company information, and a group of law firms that backed out of representing Thornburg because they were uncomfortable with the company's requests. But Orrick, Dempsey and their attorneys at Howard Rice and DLA Piper claim in their motion that Dempsey and the firm did nothing wrong and were not aware of any fraud.

As we reported in March, the trustee's complaint accuses Dempsey, Orrick and four ex-Thornburg officials of using money and personnel from the bankrupt Thornburg estate to help set up a new company called SAF Financial. The suit accuses the executives of awarding themselves bonuses and paying out millions to satisfy contracts with vendors and laid off Thornburg employees, court records show. The trustee, Joel Sher of Shapiro Sher Guinot & Sandler, claims that much of that money should have stayed with the bankrupt estate for distribution to creditors. The executives--with Dempsey's help--allegedly re-structured the Thornburg management agreement in a way that allowed them to fast-track some of these payments, including expense reimbursements. Some of those payments took place without the bankruptcy court's permission, with the goal of clearing up obligations to ex-employees, vendors and other parties so that the new company, SAF, could start on solid ground, the complaint asserts.

Amending the management agreement in this way was apparently a step that other lawyers were not willing to take, court records show. As we reported in March, the Delaware firm Pachulski Stang Ziehl & Jones recommended against altering the agreement to speed up the payment schedule, suggesting instead that Thornburg file for bankruptcy and get the court's permission to make those payments. In an email sent last April, a month before the Chapter 11 filing, Dempsey told Thornburg's chief operating officer, Larry Goldstone, about "a really ugly call" she had with Pachulski attorneys about the management agreement and other issues, according to Sher's complaint. Goldstone asked in a later email about "dumping Pachulski," and Thornburg soon jettisoned the firm. Kirkland & Ellis also backed way from doing the work. Court records attest that Thornburg executives turned to Venable only to have a falling out with that firm over disagreements about its legal advice in matters separate from the management agreement. Lawyers from Kirkland, Venable and Pachulski declined comment, as did Sher.

Sher's suit also says the named executives had employees working for the debtor devote time on the clock to SAF matters. One such employee outlined many of these allegations in an anonymous letter sent over the summer to lawyers at Quinn Emanuel Urquhart & Sullivan representing the creditors committee in the Thornburg case, court records show.

Sher's complaint does not claim that Dempsey or Orrick received any of the money that rightfully belonged to the estate; rather, the suit claims they should be held liable for defrauding the estate. In their defense, Orrick and Dempsey say Sher's reasoning is flawed. They argue he is allowed to pursue money for the estate, but that he can only take that money back from people who actually received it--in this case, the executives who received the bonuses and the vendors and ex-employees who received other payments in question.

Dempsey's broader defense is that she knew nothing about any alleged fraud and thus could not have aided the Thornburg higher-ups in committing it. Her lead attorney, Pamela Phillips at Howard Rice, declined comment.

http://www.law.com/jsp/tal/PubArticleFriendlyTAL.jsp?id=1202457661513
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Law firm partners can ill afford losing a case like this...is this why you see a settlement with no admission or denial of guilt?