In re Dreier LLP

Citations: 482 B.R. 863; 2012 WL 5464634Docket: No. 08-15051 (SMB)

Court: United States Bankruptcy Court, S.D. New York; November 8, 2012; Us Bankruptcy; United States Bankruptcy Court

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Sheila M. Gowan, the chapter 11 trustee of Dreier LLP, seeks to retain Constellation Investment Consulting Corp. as a Special Litigation Advisor and potential expert witness in her case against Amaranth Advisors LLC and Amaranth Partners LLC, titled Gowan v. Amaranth Advisors LLC, Adv. Pro. No. 10-3493. Amaranth opposes this retention, citing a conflict of interest arising from prior litigation where Constellation's principal, Boris Onefater, was retained as an expert by Amaranth’s CEO. Amaranth claims that Onefater received confidential information regarding their due diligence practices that could be relevant to the current case. The Court allowed Amaranth to submit an in camera affidavit detailing the alleged confidential information and received a public filing in support of their objection. Ultimately, the Court found that Amaranth did not adequately demonstrate the existence of relevant confidential information shared with Onefater, leading to the overruling of Amaranth's objection and the approval of the Trustee’s application to retain Constellation. The background details the Amaranth Class Action, initiated in February 2008, where plaintiffs accused Amaranth and its executives of manipulating natural gas contract prices in violation of the Commodity Exchange Act.

In July 2011, Maounis's counsel, Bingham McCutchen LLP, engaged Boris Onefater as a consulting and testifying expert to assess Amaranth's governance, investment processes, and risk management in relation to industry standards. Onefater's evaluation focused on Amaranth’s organizational structure, internal communication regarding its natural gas portfolio, and the effectiveness of its risk management reporting system. His engagement was governed by a Retention Agreement which stipulated that communications with Bingham were privileged and confidential for legal assistance purposes.

Additionally, Maounis and Amaranth entered a Joint Defense Agreement for collaboration during the Amaranth Class Action. The parties also adhered to a Protective Order from August 2008, ensuring that discovery materials were used solely for the litigation and not disclosed otherwise, with obligations surviving the action's termination. Onefater acknowledged his agreement to the Protective Order. A further Expert Stipulation from June 2009, approved by the District Court, made certain communications between parties and their experts non-discoverable, except for those relied upon in expert opinions. The Amaranth Class Action was settled on April 11, 2012, leading to the cessation of Onefater's work.

Onefater was engaged in researching and assessing the actions of Maounis regarding the establishment of Amaranth, focusing on the risk management structure used to monitor investments in natural gas futures. Although he had not completed an expert report, he prepared a draft version. The Trustee initiated the Adversary Proceeding on August 9, 2010, following the Amaranth Class Action but prior to Onefater's retention. The Trustee's Second Amended Complaint alleges that Amaranth invested in Marc Dreier's Ponzi scheme by purchasing fraudulent promissory notes from Solow Realty Company, resulting in payments of over $28 million that the Trustee seeks to recover as fraudulent conveyances under New York Debtor and Creditor Law (DCL). A key issue in the case is Amaranth's knowledge of the fraud and its good faith, with the outcome hinging on the due diligence Amaranth conducted prior to the investment. The Trustee aims to retain Onefater for his expertise in hedge fund investment practices and due diligence, seeking his assistance in reviewing Amaranth's due diligence, preparing for hearings, and potentially providing expert testimony. Onefater's analysis may also involve examining Marc Dreier's disclosures to Amaranth and evaluating compliance with industry standards in due diligence practices. Amaranth contends that it provided Onefater with confidential information during the Amaranth Class Action, claiming he should be disqualified from aiding the Trustee due to potential conflicts of interest. The court's authority to disqualify expert witnesses is rooted in its responsibility to maintain the integrity of the legal process.

In the context of disqualifying an expert witness due to a prior relationship with an adverse party, courts utilize a two-part test: (1) whether it was objectively reasonable for the party that retained the expert to believe a confidential relationship existed, and (2) whether any confidential or privileged information was disclosed to the expert. Both elements must be proven by the party seeking disqualification. 

Factors influencing the reasonableness of the belief in a confidential relationship include the duration and frequency of interactions with the expert, whether confidential information or documents were shared, existence of a confidentiality agreement, whether the expert was asked not to discuss the case, the expert's engagement as a consultant or trial witness, funding or direction provided by the retaining party, and whether the expert's ideas originated from work for the retaining party. 

In the case at hand, the expert Onefater was employed for approximately nine months as a consulting and testifying expert. He had extensive communications with Maounis’s counsel, believed to be privileged under a Retention Agreement, and received over 100 documents marked as Confidential or Highly Confidential. Onefater acknowledged receiving privileged information related to Amaranth’s risk management processes and did not contest his obligations under a Protective Order regarding the confidentiality of the information received.

At the time of the Amaranth Class Action settlement, Onefater was engaged in research and document review concerning Maounis's founding of Amaranth. No confidentiality agreement existed between Amaranth and Onefater, and Amaranth did not retain Onefater for an expert report. However, he was solicited for his opinions on Amaranth's internal processes, which implied that candid communications and information from Amaranth were necessary. The court concluded that Amaranth reasonably believed the information shared was confidential.

In assessing the disqualification of Onefater as an expert, the court emphasized that the confidential information must be relevant to the current litigation. The movant must identify specific disclosures that could prejudice their case, and vague assertions are insufficient. Amaranth failed to demonstrate the relevance or substantial relation of any confidential information shared with Onefater to the issues in the current proceeding. Their initial arguments were primarily conclusory, lacking evidence that Onefater received pertinent information regarding Amaranth's due diligence practices. Furthermore, discussions between Onefater and Amaranth's legal team included general governance and risk management matters but did not establish a direct connection to the allegations in the ongoing litigation, which involved market manipulation related to natural gas futures. The Trustee countered claims of significant relationship between the litigations, reinforcing that Onefater's focus was on oversight and risk management rather than the specific allegations being contested.

Risk management involves the executive review following investments to assess market risk for investment portfolios. In contrast, Amaranth's due diligence pertains to the pre-investment analysis used by investors to determine the viability of potential investments. The nature of due diligence differs significantly between investment types, such as natural gas and private real estate loans. Onefater denied receiving or reviewing any communications about Amaranth’s due diligence procedures, stating he only reviewed documents related to Maounis' founding of Amaranth and its risk management structure for natural gas positions. He recalled reviewing various legal and financial documents in connection with a class action but could not identify any specific communications about Amaranth’s due diligence strategies.

During oral arguments, the Court noted Amaranth’s objections lacked specificity regarding confidential communications pertinent to the due diligence issues. Counsel for Amaranth was hesitant to disclose confidential information publicly but suggested submitting an in camera affidavit, which the Court supported. However, both the public Supplemental Submission and the in camera affidavit failed to provide the requested specificity, with Amaranth arguing it was inappropriate to disclose privileged communications related to its risk management and due diligence. The Court indicated that judges often review in camera submissions to resolve discovery disputes without compromising impartiality, and emphasized that issues related to the passage of time and memory problems are challenges for the party bearing the burden of proof. The timeline revealed that Onefater's engagement by Bingham occurred while the Adversary Proceeding was ongoing, and Onefater had not displayed memory issues regarding the information he received, which included over 100 confidential documents and approximately 20 deposition transcripts.

Amaranth was required to provide relevant communications regarding its due diligence in the Adversary Proceeding involving Onefater. However, despite the assertion that records such as emails or internal memos existed, Amaranth failed to identify any specific confidential information related to its due diligence that was shared with Onefater. The in camera supplemental declaration by Neger did not substantiate claims of relevant disclosures, merely reiterating prior conclusory statements. Consequently, the Court found that Amaranth did not meet its burden of proof regarding the confidentiality of information shared with Onefater. As a result, Amaranth's objection was overruled, and the Trustee’s Application to retain Onefater as an expert was granted. Onefater's obligations under the Protective Order and Expert Stipulation remain intact. The Court also dismissed Amaranth's additional unaddressed arguments as lacking merit. Citations to the electronic docket are specified, and the Court noted the absence of the Retention Agreement and Joint Defense Agreement, while the Protective Order and Expert Stipulation are attached to the Neger Declaration. The Application to retain Onefater was also approved for two other adversary proceedings without objection.