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The fees may be good, but lawyers at O’Melveny & Myers have had a rough few weeks representing one of the nation’s largest failed subprime lenders. New Century Financial Corp. and its outside restructuring attorneys at O’Melveny misled a bankruptcy examiner about funds that may belong to creditors, according to a blistering report by the examiner unsealed last week. And the bank’s outside counsel had to apologize to U.S. Bankruptcy Judge Kevin Carey for a discovery “mishap” in which more than 700,000 e-mails weren’t turned over to the bankruptcy examiner. O’Melveny blamed an “outside vendor” for the problem in a Jan. 14 filing. “The debtors recognize that such errors, even if unavoidable in the context of such a process, cause inconvenience to participants in proceedings of this nature, and accept full responsibility,” wrote O’Melveny lawyers Ben Logan and Suzzanne Uhland, along with local counsel in Delaware. Bankruptcy examiner Michael Missal’s report and O’Melveny’s response were submitted to Carey last fall and unsealed Jan. 17. Missal, a Kirkpatrick & Lockhart Preston Gates Ellis partner in Washington, D.C., said O’Melveny attorneys “were not forthright” in their dealings with him, causing the examiner to expend additional funds to sort out the mess. That accusation stems from the bank’s handling of cash collateral, or money in the bank’s possession that may actually be the property of another party. New Century and its lawyers represented numerous times that they had done no analysis of cash collateral before the company filed for bankruptcy, Missal contends in his report. Based on those representations, the examiner concluded in August 2007 that the company had not properly handled the collateral. Then, Missal said, the company disclosed for the first time the legal advice it received from O’Melveny, which guided its cash collateral strategy. “The examiner and his counsel expressed their astonishment about these disclosures to the CEO and outside counsel,” Missal wrote, adding that the legal strategy “had never been disclosed in the more than two months that the examiner had investigated the cash collateral issue and no satisfactory explanation was given why this information was not provided.” The conflicting stories forced the examiner to needlessly spend more than $800,000, Missal wrote, plus whatever amount O’Melveny billed for litigating the issue. All told, O’Melveny has charged more than $12 million in six months of work on New Century’s wide-ranging legal issues, according to the firm’s fee applications. In their response, the O’Melveny lawyers said they never provided the examiner false information “nor did they ever intentionally or even negligently mislead him.” They said they were “shocked” when they learned in August 2007 that Missal had premised his investigation “on a fundamentally incorrect understanding” of the bank’s legal position. “No doubt, if the debtors had been able to forecast how far-fetched an assumption the examiner would make about counsel’s legal advice � they would have considered attempting to avert this odyssey by giving up their right to protect attorney-client confidences sooner,” the New Century lawyers wrote. But U.S. Bankruptcy Judge Carey said in a hearing earlier this month that he was “singularly unimpressed” with the substance of New Century’s arguments. As for the document production mishap, Missal has not yet made any filings about it. But he has consistently complained about delays and difficulties in conducting the investigation. The U.S. trustee in the case seized on New Century’s e-mail admission to support Missal’s pending request for more time to complete his investigation. “Based upon communications with the examiner, the U.S. trustee understands that the debtors previously indicated to the examiner that the e-mails at issue had, in fact, been produced,” the trustee wrote.

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