Veritas's McKeon Can't Be Represented by Schulte Roth, Appeals Court Says

Robert B. McKeon, founder of the private-equity firm Veritas Capital Management LLC, can’t be represented by the law firm Schulte Roth & Zabel LLP in litigation with an ex-employee, a New York appeals court ruled.

The court today upheld a lower-court ruling that Schulte Roth and partner Benjamin M. Polk were barred from representing McKeon in the suit because McKeon’s “interests are adverse to other members” of the Veritas entities, including the plaintiff, Thomas Campbell.

In dueling litigation, Campbell accuses McKeon and the Veritas entities of pushing him out of an investment in DynCorp International Inc., and Veritas accuses Campbell of violating his employment terms by entering deals with Omnicom Group Inc. to help the advertising company hide losses. Both cases have been on hiatus until the legal-representation question was decided.

McKeon had sought to overturn the lower court’s ruling on representation while Campbell asked the appellate division of New York Supreme Court to reverse a determination that the law firm can represent McKeon’s entities. The appeals panel upheld both decisions.

Ronald E. Richman, a lawyer for Veritas and McKeon at New York-based Schulte Roth, said he couldn’t immediately comment on the ruling. Edward M. Spiro, a lawyer for Campbell at Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer PC, didn’t immediately return a call for comment.

‘Off Its Books’

In March 2001, Campbell asked McKeon whether New York-based Veritas would form a company with an affiliate of Omnicom to help the advertising company get “certain assets off its books,” according to an August 2008 affidavit by McKeon. McKeon, after looking at the deal, declined and told Campbell not to pursue it on his own.

Campbell ignored that command, according to Veritas.

Veritas accuses Campbell of creating or controlling, between 1999 and 2002, 13 entities that engaged in transactions with Omnicom or its affiliates. Those deals saved Omnicom, the world’s second-biggest owner of advertising agencies, millions of dollars, Veritas says. Campbell himself made about $100 million from the deals, Veritas says.

‘Shocked to Discover’

“I was shocked to discover that Mr. Campbell had secretly engaged in a transaction with Omnicom,” McKeon wrote in his August 2008 affidavit.

Veritas says it fired Campbell in January 2007 after it learned, through a class-action investor lawsuit against Omnicom, of his deals with the advertising company.

In 2002, shareholders accused New York-based Omnicom, owner of the BBDO Worldwide and DDB Worldwide agencies, of securities fraud by making false and misleading statements about its Internet investments.

The investors accused the company of hiding more than $1 billion in losses from online companies it owned after the dot-com crash of 2000. The investors said Omnicom didn’t write down the assets it shifted to a new entity, Seneca Investments LLC, and that it improperly accounted for the transaction.

One analysis calculated that the value of the Internet companies declined to $100 million from $2 billion by May 2001, according to a 2005 court decision.

Tossed Complaint

U.S. District Judge William Pauley in January 2008 tossed out the investors’ complaint, saying they failed to show a link between inflated share price and disclosures they said corrected earlier company misstatements. The federal appeals court in New York upheld Pauley on March 9.

Pat Sloan, a spokeswoman for Omnicom, didn’t immediately return an e-mail seeking comment.

The investors’ allegations remain alive in Veritas’s suit against Campbell.

The investors’ expert in the class action found five transactions he evaluated to have been fraudulent.

For example, Campbell’s Chaucer Investments Co. bought the assets of several of Omnicom’s Internet companies, including Answerthink, Netcentives and Headhunter.Net Inc., by exercising a backdated option, a deal that made Campbell $28 million, according to an affirmation by Holly H. Weiss, a Schulte Roth lawyer. The purpose of the deal was for Omnicom to avoid missing its earnings targets, according to the affirmation.

In pretrial sworn testimony in the Omnicom litigation, Omnicom Chief Financial Officer Randall Weisenburger said Campbell controlled at least six entities, some of which did business with Omnicom, and he made at least $174 million between 1999 and July 2002 on his Omnicom transactions, according to the Weiss document.

Business Partner

Campbell is a friend and former business partner of Weisenburger, according to court papers.

Campbell sued McKeon and the Veritas entities in state court in New York in March 2008. He claims McKeon used the Omnicom situation to oust him from Veritas and that his former boss also pushed him out of the deal for DynCorp, a military- services provider in Falls Church, Virginia.

“Campbell’s personal investment transactions with Omnicom were passive in nature, not appropriate for the Veritas Funds, and did not usurp any corporate opportunity that belonged to Veritas or divert any of Campbell’s professional time or resources away from the operation, management or investment of Veritas,” Campbell said in his complaint.

The DynCorp investment would require about $100 million, according to Campbell’s court papers. McKeon, after promising other members and employees they could participate, instead personally invested $48 million, according to Campbell. Thus, Campbell says he missed out on the profit from DynCorp’s May 2006 initial public offering.

DynCorp Stake

McKeon’s DynCorp stake was worth about $225 million in March 2008, according to Campbell’s complaint.

Private-equity firm Cerberus Capital Management LP this month completed its purchase of DynCorp for about $1.47 billion, including the assumption of debt.

Campbell claims that he’s owed a year-end distribution of $2 million for 2006 and that he’s entitled to remain a member of the Veritas entities.

In January 2009, New York Supreme Court Justice Herman Cahn threw out five of Campbell’s 10 claims, including one for wrongful termination. Others remain, such as breach of contract.

Veritas also sued Campbell in March 2008, accusing him of violating his obligations to the entities. In November 2008, Cahn threw out four of seven claims, leaving in two contract claims and one for declaratory judgment.

Capital Partners

After leaving Veritas, Campbell started Washington-based DC Capital Partners LLC, also a private-equity firm focusing on defense, intelligence and other government-contract companies. In March, International Business Machines Corp. completed its acquisition of National Interest Security Co. from DC Capital. Terms weren’t disclosed.

WPP Plc, based in London, is the world’s biggest owner of advertising agencies.

The cases are Campbell v. McKeon, 600673/2008, and Veritas Capital Management LLC v. Campbell, 650058/2008, New York State Supreme Court, New York County (Manhattan).

To contact the reporter on this story: Thom Weidlich in New York federal court at tweidlich@bloomberg.net.

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