Report says firm should've withdrawn from KCL case

FRANKFORT, Ky. (AP) - Democratic gubernatorial nominee Steve Beshear's former law firm should have withdrawn more than a decade ago as legal counsel on a mammoth corporate bankruptcy case because of a conflict of interest, independent attorneys wrote in a confidential report released Saturday.

The 90-page report, prepared 12 years ago but until now was hidden from the public, has become political fodder in the race between Beshear and incumbent Gov. Ernie Fletcher, both of whom have made ethics a central issue in their campaigns.

"The report released today confirms what I have said all along, that I have conducted myself in an ethical manner," Beshear said Saturday afternoon.

The law firm, Stites & Harbison, released a statement Saturday saying the report shows there was no basis for allegations of unethical conduct on Beshear's part and that interest in the report has been driven exclusively by his campaign for governor.

The report looked into an alleged conflict of interest that involved Stites & Harbison's representation of both the Kentucky Office of Insurance and the Bank of Louisville in the bankruptcy of Kentucky Central Life Insurance Co.

The Office of Insurance and two judges in the case "unanimously concluded that neither I or Stites & Harbison had done anything wrong and that we should continue to represent the liquidator in the Kentucky Central matter," Beshear said.

The Cincinnati law firm of Porter, Wright, Morris & Arthur, which compiled the report, said that Stites & Harbison could have been discharged for breach of contract or kept on and held accountable for any financial damages.

"However, we currently lack sufficient information to recommend which, if any remedy, or combination of remedies is appropriate," said independent attorneys who wrote the report.

According to the report, an attorney in Stites & Harbison's Louisville office advised the Bank of Louisville to sell $15 million worth of Kentucky Central securities. That prevented the securities from being turned over to the Kentucky Office of Insurance to be used to help revitalize the firm.

The move, according to report, was "patently detrimental" to efforts to "protect, reform and revitalize Kentucky Central."

Stites & Harbison's statement says the report, which it's had two days to review, shows there was "no basis" for allegations of unethical conduct on Beshear's part. Interest in it "has been driven exclusively by the fact that the firm's former partner, Steve Beshear, is now a candidate for governor," the firm said.

The report was released to the public Saturday afternoon at the request of the Herald-Leader and The (Louisville) Courier-Journal, who filed a motion seeking its release.

Stites & Harbison of Lexington, was paid $21 million over 15 years for assisting in the liquidation of Kentucky Central. The investigation, which had not been publicly disclosed, was reported last month by the Lexington Herald-Leader.

(Copyright 2007 by The Associated Press. All Rights Reserved.)

AP-NY-10-06-07 1523EDT

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