U.S. Trustee, advisers settle in GSC bankruptcy case

Tue Feb 12, 2013 10:27am EST

Feb 12 (Reuters) - Financial adviser Capstone Advisory Group LLC and Robert Manzo settled with the U.S. Justice Department, and agreed to forgo a part of their fees in the bankruptcy of investment management firm GSC Group Inc.

A bankruptcy watchdog was seeking to void the firm's fees due to the mischaracterization of Robert Manzo - a Capstone contractor who was presented to the bankruptcy court as a direct employee - that may have helped in inflating fees.

Under the settlement agreement, Capstone admitted that it erroneously described Manzo as an employee of Capstone through RJM LLC and agreed to pay $1 million to the GSC estate by withdrawing its final fee application of $2.75 million, and giving up about $635,000 that it was paid as compensation.

Capstone will also agree to appoint an independent monitor at its own expense to review its internal policies relating to retention applications in bankruptcy cases.

The U.S. Trustee also entered into a settlement agreement with Robert Manzo under which his firm will resign as the liquidating trustee in the case and will forgo payment of about $175,000 of the $398,500 in accrued but unpaid fees it has incurred.

The agreement also calls for any company controlled by Manzo to comply with conflict checking and disclosure procedures that the independent monitor will establish at Capstone if it is retained by the firm in a bankruptcy case.

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 the 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.

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.

Most 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. In GSC's case, 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 court papers.

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.

Manzo is well-established in the restructuring world, having advised on major cases for more than 25 years, including those of fallen brokerage firm Refco and auto giant Chrysler.

The settlement agreements require bankruptcy court approval.

The case is In re GSC Group Inc et al., U.S. Bankruptcy Court, Southern District of New York, No. 10-14653.

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