New Jersey-based law firms Lowenstein Sandler and Porzio, Bromberg & Newman are accused in a suit of breaching their fiduciary duties to shareholders in the bankruptcy of pharmaceutical maker Aceto Corp.
The suit, which concerns the award of $13 million in legal work by a bankruptcy plan administrator who was hired as a partner in the firm getting the work, could be a serious distraction for the defendant firms.
Lowenstein’s work for Aceto general counsel Steven Rogers, the bankruptcy plan administrator, coincided with Rogers’ employment as a Lowenstein partner, the suit said. By failing to make timely disclosure of Rogers’ status as a Lowenstein partner, “Lowenstein intentionally put itself, and Rogers, in positions of divided loyalty,” the suit claims. And by failing to report that divided loyalty to beneficiaries of the bankruptcy plan or to the court, Porzio “acted to perpetuate the Rogers-Lowenstein conflict,” the suit claims.
Rogers began working at Lowenstein on Oct. 2, 2019. The firm issued a press release on Oct. 15 to announce that he had joined the firm as a partner.
On Oct. 30, 2019, the U.S. trustee wrote to Lowenstein, and sent a copy of the letter to Porzio, stating that the trustee was concerned about the disclosure and conflict of interest raised. The letter asked what procedures are in place to review Lowenstein’s compensation requests and whether Rogers would review the firm’s fee application.
On Oct. 31, Lowenstein filed a $13.8 million fee application, but did not respond to the questions raised by the trustee.
On Dec. 19, 2019, the court approved Lowenstein’s application for $13.2 million, which it said it voluntarily reduced in response to the trustee’s concerns.
Rogers, for his part, was removed from his position as plan administrator under an agreement approved on Oct. 16, 2020, after the oversight committee in the case raised objections to his relationship with Lowenstein. The agreement called for Rogers’ replacement, a company called BAK Advisors, to conduct a review of fees awarded to Lowenstein in the case.
The plaintiffs are two investment funds and an individual—Palm Global Small Cap Master Fund LP, Pinnacle Acquisition Fund II LLC and Kenneth Grossman. They brought the suit on behalf of a potential class of parties who had stock in Aceto Corp.
Aceto, of Port Washington, New York, a maker of ingredients that were supplied to drug companies, sold off its assets in 2019.
The suit brings claims for breach of fiduciary duty against Rogers, Lowenstein and Porzio on behalf of shareholders.
A Lowenstein spokesman said in a statement about the suit, “Lowenstein is proud that the Aceto bankruptcy case has had a highly successful outcome to date, well-exceeding the expectations of all stakeholders. At the end of the day, it is expected that all of Aceto’s creditors will have been paid in full, and that there may well be a sizable distribution to Aceto’s former public shareholders. The bankruptcy court has expressly recognized this successful outcome.
“The newly filed class action is the fifth or sixth attempt by these plaintiffs to improperly steer funds to themselves through a questionable penny stock strategy,” the Lowenstein statement said. “These claims recycle spurious allegations made in a prior lawsuit that is currently the subject of a dismissal motion and is in mediation. Further, Lowenstein’s fees have been subject to the review of an independent committee in the bankruptcy proceeding, that committee’s counsel, as well as an independent plan administrator selected by creditors whose appointment was approved by the Bankruptcy Court.”
Porzio managing principal Vito Gagliardi said in an email about the suit, “This is a strike suit brought by a tiny group of stockholders frustrated by their failure to obtain a preferred cash distribution to which, as I understand it, they simply were not entitled. We look forward to a chance to respond.”