By Nick Brown
NEW YORK, Jan 8 (Reuters) - The U.S. Justice Department
wants a bankruptcy court to strip law firm Kaye Scholer and
financial adviser Capstone of more than $10 million they earned
through the bankruptcy of investment management firm GSC Group
The firms covered up key business relationships that may
have served to inflate their fees, according to court papers
filed on Friday by the U.S. Trustee Program, the DOJ arm that
GSC, founded by former Goldman Sachs Group Inc partner
Alfred Eckert, declared bankruptcy in August 2010, hampered by a
liquidity squeeze and declining asset values brought on by
global recession. The case in U.S. Bankruptcy Court in Manhattan
culminated in the 2011 sale of GSC's assets to lender Black
Diamond Capital Management.
GSC tapped Kaye Scholer and Capstone as legal and financial
advisers, respectively. Robert Manzo, the trustee in charge of
liquidating certain GSC assets in the wake of the sale, was
listed in court filings as a Capstone employee, the U.S. Trustee
said in its filing.
But Manzo was actually an independent contractor with whom
Capstone had signed a fee-sharing agreement, information the
firms kept from the court in violation of bankruptcy laws, the
U.S. Trustee claimed.
The parties "perpetrated a fraud on this court by willfully
concealing and affirmatively misrepresenting the true nature of
Capstone's employment and financial relationship with" Manzo,
the regulator said.
An attorney for Capstone called the allegations "without
"Capstone looks forward to the opportunity to respond to,
and the Court's speedy determination of," the allegations,
attorney Steven Mandelsberg said.
Sandi Sonnenfeld, a spokeswoman for Kaye Scholer, said the
firm believes the U.S. trustee's assertions "are without merit
and we will establish that in responding to the motion."
An attorney for Manzo did not respond to a request for
comment on Monday evening.
Under his agreement with Capstone, Manzo was entitled to
nearly all of the fees he billed, as well as 15.5 percent of the
fees billed by Capstone and a percentage of any so-called
"success fee" the firm collected after the case, according to
He has earned about $4 million in the case, more than half
of Capstone's total bills, court papers show.
Such fee-sharing agreements are barred by bankruptcy rules,
in part out of concern that firms might inflate their fees to
make up for the cost of sharing.
Capstone never disclosed the agreement and referred to Manzo
as an employee, not a contractor, while lawyers at Kaye Scholer
created a conflict of interest by failing to disclose knowledge
of Manzo's contractor status and keeping mum about longstanding
relationships with Manzo.
"It is reasonable to conclude that Kaye Scholer would be
hard pressed to take issue with Capstone's bills in these
cases," the U.S. Trustee said, noting that Kaye Scholer attorney
Michael Solow, who worked on the GSC case, was a personal friend
of Manzo's and worked closely with him on major bankruptcies,
Solow did not respond to a request for comment.
Because lawyers and other professionals are paid ahead of
creditors in Chapter 11, bankruptcy laws carry strict disclosure
requirements to minimize conflicts of interest and ensure as
much money as possible is reserved for creditors.
The U.S. Trustee, a watchdog for how money is spent in
bankruptcy, has taken a hard line lately on issues of
professional compensation among outside advisers and insiders of
In addition to the more than $10 million Capstone and Kaye
Scholer have already pocketed, Capstone has requested a $2.75
million success fee for its work in the case, of which $1.65
million would go to Manzo, the U.S. Trustee said in its filing.
The regulator is asking the court to deny the request,
vacate the retentions of Capstone and Kaye Scholer, and force
the firms to disgorge money already earned.
The case is In re GSC Group Inc et al., U.S. Bankruptcy
Court, Southern District of New York, No. 10-14653.
For the trustee: Andrea Schwartz, office of the U.S.
For Kaye Scholer: Matthew Micheli and Michael Solow, Kaye
For Capstone: Steven Mandeslberg of Hahn & Hessen, Andrew
Leblanc of Milbank Tweed Hadley & McCloy.
For Manzo: Paul Shalhoub of Willkie Farr & Gallagher.
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