By Nick Brown
NEW YORK, Feb 19 (Reuters) - Law firm Kaye Scholer will give
up $1.5 million it earned as bankruptcy counsel to GSC Group
Inc, in the latest settlement in a dispute over a failure to
disclose relationships between bankruptcy advisers.
The law firm, which steered investment manager GSC through
its Chapter 11 bankruptcy in 2010, failed to disclose long-term
professional and personal ties to Robert Manzo, the chief
restructuring officer in the case, the Justice Department had
argued in court papers.
The firm also failed to disclose the fact that Manzo was an
independent contractor, not an employee of Capstone Advisory
Group, the financial adviser with which he was affiliated, the
The settlement with the Justice Department, announced on
Friday, follows settlements the department reached last Tuesday
with Capstone and Manzo. Capstone will hand over $1 million in
fees and withdraw a pending request for another $2.75 million.
It will also resign, along with Manzo, from its remaining role
in the case. Manzo, in addition to resigning, must forgo
$175,000 in accrued but unpaid fees.
The latest settlement is subject to approval by the U.S.
Bankruptcy Court in Manhattan, which has scheduled a hearing for
In addition to forfeiting money, Capstone must hire an
independent monitor to review its disclosure policies, while
Kaye Scholer must hire an outside expert to assist in a
self-review of its policies.
Kaye Scholer, which had made more than $5 million from the
case, said it agreed to the settlement "to avoid the distraction
of a trial," and had not acknowledged any wrongdoing.
"It remains undisputed that Kaye Scholer contributed to the
exponential enhancement of the value of the GSC estate," Aaron
Rubinstein, the firm's general counsel, said in a statement on
In a statement last Wednesday, Capstone said the GSC case
"represents the best of what Capstone does." The company noted
that it helped get $235 million for an asset sale to lender
Black Diamond Capital Management, when an initial bid had come
in as low as $5 million.
A lawyer for Manzo declined to comment.
The U.S. Trustee Program, the Justice Department's
bankruptcy watchdog, had sought to strip Kaye Scholer, Capstone
and Manzo of more than $10 million in fees accrued in the case.
The trustee said Capstone Executive Director Ed Ordway and
Kaye Scholer partner Michael Solow made public statements
calling Manzo a Capstone employee when he was actually a
contractor working for his own limited liability company.
That made Manzo a separate professional entity, the trustee
argued, and required him to make certain disclosures under
bankruptcy laws designed to guard against conflicts of interest.
The trustee said Manzo could have conflicts of interest
because he had a longstanding professional and friendly
relationship with Solow.
The arrangement also violated a bankruptcy law that
prohibits fee sharing between firms, the trustee argued.
As chief restructuring officer, Manzo was in charge of
liquidating certain of GSC's assets in the wake of its sale.
The case was a big moneymaker for Manzo, earning him around
$4 million, court papers show. He was entitled to nearly all of
the fees he billed, as well as 15.5 percent of the fees billed
Such fee-sharing arrangements can result in higher fee costs
for the bankrupt company, though it is not clear that that
happened in GSC's case. Capstone says it paid more to Manzo than
the GSC estate paid to it.
But in an indication of a hard-line approach to disclosure
issues, Trustee Director Cliff White said in a statement last
week his office will take "vigorous enforcement action when we
uncover evidence that experienced professional firms have failed
to satisfy their bedrock obligations to provide true and
White could not be reached for comment on Friday.
Capstone has argued that its relationship with Manzo falls
under an exception that allows fee sharing with advisers who are
"members, partners or regular associates" of the firm.
The distinction comes down to "whether the person is under
the control of the firm," said George Kuney, a professor at the
University of Tennessee at Knoxville's College of Law.
"Does the firm tell them what to do and how to do it?" Kuney
said in an interview with Reuters. "If not, then they are an
Captone said Manzo was an employee in all but title and
worked exclusively for the firm.
Manzo's contractor status means Capstone probably cut him a
check directly, as opposed to paying him a salary and providing
him a W-2 tax form at the end of the year, Kuney said.
Manzo is one of a handful of restructuring professionals
with the resume to arrange such a contract. An industry veteran
of more than 25 years, he has worked on major cases including
fallen brokerage firm Refco and auto giant Chrysler.
According to court papers, Manzo felt a contractor
relationship was best due to his history with Capstone advisers.
Manzo in 2000 sold his own firm, Policano & Manzo, to FTI
Consulting. When left FTI in 2004, was subject to two years'
leave in which he could not work on related matters, a person
close to the GSC case said.
While he was gone, the group that had followed him from
Policano spun themselves off from FTI to form Capstone.
When Manzo went back to work in 2006, he wanted to affiliate
with his old colleagues, now working at Capstone, said the
person close to the matter, who declined to be named because
they were not authorized to speak to the media. But he requested
a contractor set-up because he did not feel comfortable
reporting to or managing his former underlings, the person said.
Contractor status, while not necessarily the norm, is not
unheard of, Kuney said.
"At that high level of the game, everything is a custom
arrangement," he said.
Capstone, Manzo and Kaye Scholer conceded that, while they
felt Manzo would have been exempted from making disclosures as a
professional entity, they should have acknowledged his
contractor status. That they didn't, they claimed, was an honest
"Mistakes were made," Kaye Scholer said in court papers.
Capstone, for its part, said executive director Ordway
"incorrectly" called Manzo an "employee."
Approval of the settlements is not a sure bet: According to
a person close to the matter, Black Diamond, the lender that
acquired GSC's assets, will likely make a formal objection to
the settlement before the hearing.
In a letter last week to the court, Black Diamond said the
settlements were flawed because they release the parties from an
overly-broad swath of potential legal claims that could improve
Black Diamond declined to comment.
The case is In re GSC Group Inc, U.S. Bankruptcy Court,
Southern District of New York, No. 10-14653.
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