Boies firm says: Where's the beef?
Analysis: Judge overseeing Adelphia bankruptcy will hear arguments on the connection between vendor and David Boies' children.
NEW YORK (CNNMoney.com) - The judge overseeing the bankruptcy of Adelphia Communications will hear arguments Monday afternoon on whether to appoint a special examiner to explore an alleged conflict of interest that led the cable provider to fire famed litigator David Boies and his firm last August.
Judging from court filings, Boies's critics have still not shown any actual harm from what happened, or even that his firm, Boies Schiller & Flexner (BSF), violated any clear disclosure obligation. Still, the incident continues to embarrass the firm.
The request for the examiner was triggered by BSF's application to be paid the $7.6 million outstanding balance on its fees and expenses for representing Adelphia since 2002, which totaled $31.7 million.
U.S. Bankruptcy Judge Robert E. Gerber of Manhattan is empowered to deny all or any portion of the application, including sums already paid. Adelphia, its unsecured creditors, and equity holders -- who stand to benefit if BSF's fees are slashed -- all seek an examiner; Boies's firm opposes one.
Adelphia asked for BSF's resignation in August 2005 after learning that Boies's children owned a stake in Amici, a document management company that Adelphia had been using for almost three years at BSF's recommendation, incurring bills of more than $7 million. (These went directly to Adelphia, and are not included in the BSF fee application.)
Adelphia has also protested that BSF should have disclosed that Amici's founder, Bill Duker, was a convicted felon, whose crimes involved overbilling clients.
Who knew what, when?
The BSF partner who had recommended Amici to Adelphia, Philip C. Korologos, has filed affidavits stating that he did not learn of Boies's children's stake until late July 2005, when the issue was raised by an attorney for a creditor bank at a hearing.
BSF also maintains that several Adelphia directors, who were then closely supervising the company, knew of Duker's past at the time of Amici's retention.
The odd incident stems in part from Boies's and other BSF lawyers' long friendship with Duker. A 1981 graduate of Yale Law School and already, by then, the published author of an authoritative treatise on habeas corpus, Duker had a meteoric but foreshortened legal career.
As an associate at Cravath, Swaine & Moore, where Boies was then a partner, Duker helped Boies successfully defend CBS in a celebrated libel suit filed by General William Westmoreland. In 1987 Duker founded his own firm, but continued to work as co-counsel to Boies on high-profile cases, including cases to recover billions looted from S&Ls for the Federal Deposit Insurance Corporation.
In 1997, however, Duker pleaded guilty to four federal felonies for having overbilled the FDIC. He was sentenced to 33 months in prison.
Boies, who left Cravath in 1997 to form his own firm, remained friendly with Duker, and his firm eventually absorbed what remained of Duker's. After serving his time, Duker -- by then disbarred -- went into business. In 2002 he founded Amici. He visited BSF to show his old colleagues there how it worked, according to BSF partner Korologos.
Korologos had been a Cravath associate who worked with Duker in the early 1990s. Korologos was impressed with Duker's product, he told Fortune in October. (Amici was eventually retained by many corporations who were not BSF clients and also, according to BSF, by the U.S. Attorney's Office in Manhattan, which had prosecuted Duker.)
In spring 2002, Adelphia hired BSF as an accounting scandal began to unfold involving its founder and then-CEO John Rigas and his sons. (Rigas was convicted in 2004 and sentenced to 15 years.) BSF became Adelphia's counsel in dealing with criminal and civil investigations and bringing suits to recover funds from Rigas family members and Adelphia's former accountants at Deloitte & Touche. No one is now questioning the quality of BSF's work.
While David Boies advised Adelphia's board, Korologos became BSF's lead litigation counsel.
In fall of 2002, Korologos says, he suggested that Adelphia hire Amici as its document management company. He did not then realize, he says, that David Boies's six children -- including three who worked at BSF -- had indirect stakes in the company. Though many have found that hard to believe, the claim appears plausible in context.
David Boies's oldest child, David Boies III, 45, leads his own law firm, which is unrelated to BSF. He handles a portfolio of investments on behalf of himself, his five siblings, and their children, and does not preclear his investments with the beneficiaries, according to BSF.
One of the investments in his portfolio was a 50 percent stake in a company called Datamine, which, in turn, held a 51 percent stake in Amici. The children therefore held an "indirect, passive, minority interest" (25.5 percent) in Amici, according to BSF.
Korologos knew nothing about Boies III's investment portfolio in fall 2002, when he recommended Amici to Adelphia, he maintains. Indeed, other than Boies III, it appears that the Boies children themselves did not know of their stakes in Amici at that time.
Christopher Boies, a BSF corporate partner -- and, according to Adelphia, the "billing partner" on its BSF account -- maintains in an affidavit that he did not learn of his indirect 3.6 percent stake in Amici until a year after Adelphia had retained it.
Caryl Boies, a BSF partner based in Florida (not involved in the Adelphia case) didn't find out till July or August 2005, while BSF employee Jonathan Boies learned of it in the Fall of 2004, according to their filings.
David Boies himself has not filed an affidavit stating when he found out about his children's stakes in Amici. (He could not immediately be reached for comment over the Superbowl weekend.) Boies told the Wall Street Journal in August, "I should have made certain that everyone knew about it."
BSF maintains in its briefs that Boies was then referring to what he should have done as a matter of good business practice, not legal obligation.
As for Duker's past, BSF maintains that Adelphia did know about it, at least at "the Board level." Director Anthony Kronman, for instance, who joined the board in October 2002, was then the dean of Yale Law School; in 1997 he had written a letter to Duker's sentencing judge urging leniency. (Kronman declined comment.)
On the other hand, the BSF filings stop short of establishing that any director, including Kronman, specifically knew of Duker's involvement in Amici.
Assuming the accuracy of BSF's version of the facts, four experts in professional ethics retained by BSF have asserted in affidavits that BSF violated no ethical or bankruptcy-related disclosure obligations. Though attorneys in a bankruptcy are required to disclose their ties to "parties in interest," they are not asked to disclose ties to vendors, these experts say.
There's one final twist to the Amici story.
In 2003, Adelphia's managers complained to BSF that Amici's bills were too high. Adelphia alleges that an ensuing e-mail exchange shows that BSF acted in bad faith.
On August 1, 2003, Adelphia's director of restructuring wrote Korologos: "rumor has it . . . that AMICI is a start-up company managed by a former Boies partner." Korologos responded the next day: "Amici is not associated with a former Boies partner. Bill Duker who runs Amici has been someone several of the partners at Boies have known for some time, but he was never a partner of, employed by, etc. Boies Schiller. I'm not sure where you heard that one."
Adelphia characterizes this response as "remarkable" for having concealed "the shocking facts" about Duker's past.
BSF, on the other hand, maintains that Korologos's response was accurate and that, again, Adelphia's directors already knew of Duker's past. Moreover, BSF focuses on what happened next, which is that the U.S. Trustee and a special committee that audits fees compared Adelphia's invoices to those of comparable vendors in other bankruptcies.
They then asked Amici for certain discounts on their rates, and Amici agreed. The discounted rate was then applied to all invoices since May 2003 -- almost all of Amici's billings. Thus, BSF argues, Adelphia cannot claim that it was overcharged.
Antitrust authorities approved plans by Time Warner and Comcast to buy Adelphia, click here for more.