According to Financial Times News, Gerhard Schmidt, co-managing partner of Weil Gotshal’s German offices, personally invested €5 million in the private equity fund that acquired Israel’s NSO Group in 2017 under preferential fee terms. Schmidt simultaneously served as legal adviser on the fund’s February 2019 acquisition of NSO, sat on the board of a holding company overseeing the spyware firm, and chaired Novalpina Capital, the buyout group whose €1 billion fund purchased NSO. The investment arrangement, detailed in a New York court filing, meant Schmidt avoided fees paid by other investors due to his “existing relationship” with Novalpina’s founders. Schmidt’s dual roles as investor and legal adviser occurred while NSO’s Pegasus spyware was allegedly used to target journalists and activists, including after the 2018 murder of Jamal Khashoggi. This complex web of financial and professional relationships raises significant questions about legal ethics and private equity governance.
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The Gray Area of Legal Professional Investments
While the Financial Times notes it’s “not uncommon for senior lawyers at large firms to personally invest in the private equity funds they advise,” the scale and circumstances of Schmidt’s involvement create unique ethical considerations. Large law firms typically have strict conflict of interest policies, but these arrangements exist in a regulatory gray area. When a lawyer invests personally in a client’s fund while providing legal advice on the same transactions, their financial interests may potentially influence their professional judgment. The American Bar Association’s Model Rules require lawyers to avoid conflicts where their personal interests might materially limit their representation, but the application to private equity investments remains nuanced and often firm-specific.
Private Equity Governance Under Scrutiny
The Novalpina situation reveals broader governance challenges within the private equity industry. The fund’s dramatic implosion in 2021, with founders being stripped of control after irreparable disagreements, demonstrates how personality conflicts can jeopardize investor capital. The Oregon Public Employees Retirement Fund’s reported 57 cents on the dollar valuation and negative 15.3% internal rate of return highlight the real financial consequences of governance failures. This case may prompt institutional investors to demand stronger oversight mechanisms and clearer separation between fund management and professional service providers.
The Evolving Regulatory Landscape for Spyware
NSO Group’s journey from private equity darling to U.S. Commerce Department blacklist in November 2021 reflects rapidly changing attitudes toward spyware technologies. The U.S. government’s designation that NSO’s tools enabled “transnational repression” marked a significant policy shift that fundamentally altered the company’s business prospects. This regulatory environment continues to evolve, with recent European Union proposals seeking to restrict spyware exports and stronger oversight of surveillance technology. For legal professionals advising in this space, the changing regulatory landscape creates additional due diligence responsibilities that extend beyond traditional financial analysis.
Broader Implications for Professional Services
This case may have ripple effects across the professional services industry in New York and other global financial centers. Law firms, consulting practices, and financial advisors may face increased scrutiny of their personal investment activities alongside client work. The Luxembourg legal proceedings seeking information from Weil, though the firm isn’t a direct party, demonstrates how professional service providers can become entangled in fund disputes long after transactions conclude. As institutional investors like pension funds become more activist about governance, we may see pressure for clearer disclosure of side arrangements and preferential terms for professional advisors.
Industry Outlook and Predictions
The combination of Novalpina’s collapse, NSO’s blacklisting, and Schmidt’s upcoming departure from Weil at year-end suggests we’re witnessing a turning point in how professional services intersect with controversial technologies. Moving forward, I expect to see more conservative approaches from elite law firms regarding partner investments in client funds, particularly when dealing with politically sensitive technologies. The euro-denominated nature of this investment also highlights how global law firms must navigate multiple regulatory jurisdictions simultaneously. As surveillance technology continues to draw political and ethical scrutiny, legal advisors will likely face increased pressure to conduct enhanced due diligence that considers both legal compliance and broader human rights implications.
