A recent whistleblower case in Massachusetts has rocked the widely accepted notion that private equity investors are insulated from risk beyond the scope of their financial investment.

In the case, the Massachusetts Attorney General pursued claims for purportedly improper and fraudulent billing against the underlying healthcare provider but also pursued the private equity fund that invested in the entity and had board members involved at the management level.

While the case ended in a settlement for the private equity fund, it’s important to remember that the fund neither accepted nor denied guilt in the situation.

However, regardless of guilt, the fund was viewed as a potential area of pursuit in litigation. This fact alone is noteworthy and warrants further discussion.

David Pivnick, Partner at McGuireWoods and expert in complex corporate healthcare litigation, weighs in on the scenario and draws an important distinction between the role of investor as owner and the role of investor as decision-maker.

On the premiere episode of The Professor’s Corner, David tells McGuireWoods’ Geoff Cockrell how funds can limit risk and lead with a compliance-driven mindset. Seeking counsel, documenting deliberations, and providing regular compliance training sessions for board members are worthwhile investments.

Featured Experts

Name: Geoffrey Cockrell

What he does: Geoff is the Chair of McGuireWood's private equity group and serves on the firm's Board of Partners; he has extensive experience in mergers and acquisitions, especially in the healthcare space.

Organization: McGuireWoods

Connect: LinkedIn

Name: David Pivnick

What he does: As a Partner at McGuireWoods, David co-chairs the Healthcare and Life Sciences Industry Team. David primarily practices complex commercial litigation in healthcare.

Organization: McGuireWoods

Words of wisdom: “If you’re not comfortable putting in writing how you landed at a decision and how factors were ultimately weighed, to me, the bigger sign is not, Don’t put this in writing at the board level. It’s: Don’t make that decision, and go on a different pathway.”

Connect: LinkedIn

Notes From the Professor’s Corner

Top takeaways from this episode

★ Having the best intentions makes a difference. According to David, there’s an important distinction to be made between a board that seeks counsel and makes an educated (but ultimately bad) decision and a board that is directly informed of misconduct and looks the other way or proceeds despite the warnings.

★ In difficult situations, document deliberations to clarify the rationale. Boards should not be afraid of documentation. Often, legal issues arise months to years after a decision is made. When a minimal paper trail exists, it is hard to demonstrate the debate and reasoning behind past choices.

★ Ensuring best practices in compliance should extend to the board level. For example, forming a compliance committee or identifying a compliance officer who can speak candidly with private equity investors allows the board to minimize risk.

 

Episode Insights

[00:38] A jarring settlement: Geoff and David discuss a recent court case that has potential implications for private equity funds — risk extends beyond financial investment.

[02:51] Ownership vs. board involvement: David differentiates between a private equity investor’s role as owner and as decision-maker.

[04:52] The gray area: David discusses how board leadership can make nuanced decisions when there isn’t a clear black and white answer.

[06:48] Documenting deliberation: David explains the importance of record-keeping and compliance for board-level leadership.

[12:41] ‘Don’t put it in writing’: David raises a red flag in scenarios where individuals or groups are hesitant to document conversations.

[16:15] The ‘one purpose’ rule: Geoff and David talk about the Anti-Kickback Statute and the importance for private equity funds to operate with a compliance-focused mindset.

 

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