Former Heller Ehrman Chairman Matthew Larrabee is vowing to fight allegations by the defunct firm's creditors that it pumped up its profits in early 2008 and then tried to cover it up.
"The assertions in the Creditors' Committee report are without merit and are not supported by citations to any source," Larrabee said in an e-mailed statement. "These claims will be vigorously defended at the appropriate time."
Other former high-level Heller management, including Barry Levin, Robert Hubbell and CFO Richard Holdrup, declined to comment publicly.
The creditors committee took its biggest shot to date against former shareholders and their management in an interim financial report filed Friday in federal bankruptcy court.
It alleged that management "made some very troubling business decisions" as the firm was unraveling and, in an effort to boost its 2007 numbers, overpaid partners $9 million in profits.
Thomas Willoughby, counsel for the creditors committee, said the allegations are based on a review of the firm's financial books and records by the committee's financial adviser, Development Specialists Inc.
Larrabee did not respond, and Levin, Hubbell and Holdrup declined to answer, when asked if there was a reasonable explanation for the $9 million discrepancy creditors have apparently found in Heller's books.
One former shareholder, Michael Rugen, said after his own investigation, he and other shareholders have concluded there simply was not any overpayment, but he could not explain further.
"All the shareholders I know believe Willoughby is mischaracterizing the facts and there were no overdistributions," said Rugen, who advises accounting firms as a securities lawyer.
The creditors' move could figure into negotiations with former shareholders. No settlement talks have occurred so far between the shareholders and the creditors committee, Rugen said. A mediation process with several shareholder groups may start soon, according to the creditors' filing.
Willoughby has said he's seeking a "Coudert Brothers" settlement, in which a comprehensive deal allowed the bankruptcy to conclude in short order, as opposed to a messier "Brobeck style" situation, in which litigation has drawn out for six years and counting.
The creditors are trying to make the case that the firm was insolvent as early as 2007, and therefore money that flowed out of it since then belongs to creditors. The report alleges that the shareholders owe the estate $106 million, the amount of profits paid to them in 2007 and 2008.
The legal theory is called fraudulent conveyance, and it can be intentional or unintentional.
The committee tries to make its case by pointing out that in late 2007 Heller started to show signs of financial distress. The firm wrote 118 checks totaling $3 million at the end of 2007, then placed a hold on them until early 2008, the creditors allege. The firm also did not follow its normal practice of prepaying 2008 expenses by $3 million. Then, there's the alleged overpayment of profits to partners.
While the latest filing may be the creditors' most aggressive move against shareholders to date, it may not be their last. A footnote in the document notes that "other areas that are not addressed in this status report include ... potential breaches of fiduciary duty by members of management."