* Law firm Kaye Scholer, financial adviser Capstone admit
* Firms presented contractor as Capstone employee
* Regulator seeks to strip firms of $10 mln in fees
* GSC went bankrupt in 2010, sold assets to Black Diamond
By Nick Brown
NEW YORK, Jan 29 Law firm Kaye Scholer and
financial adviser Capstone admitted on Monday to making
"mistakes" during the bankruptcy of investment management firm
GSC Group Inc, but said they should not have to forfeit more
than $10 million in fees earned from their work.
Bankruptcy watchdog the U.S. Trustee Program is seeking to
void the firms' fees because of their mischaracterization of
Robert Manzo, a Capstone contractor who was presented to the
bankruptcy court as a direct employee.
Kaye Scholer served as legal counsel to GSC in bankruptcy,
while Capstone was the company's financial adviser.
In court papers filed earlier this month, the Trustee, the
Justice Department's bankruptcy regulatory arm, said the firms
covered up Manzo's contractor status and fee-sharing arrangement
with Capstone, which may have served to inflate their fees.
The trustee said professionals in the case also covered up a
longstanding personal and professional relationship between
Manzo and Kaye Scholer partner Michael Solow, which may have
posed a conflict of interest in the case.
Capstone, Kaye Scholer and Manzo hit back on Monday, saying
in court papers the dispute comes down to one "inaccurate word."
The parties acknowledged a round of Mea Culpas for calling
Manzo an "employee," but maintained that the mistakes did not
harm GSC or cost its creditors any payback.
"Mistakes were made," Kaye Scholer said in a filing in U.S.
Bankruptcy Court in Manhattan, conceding its partners were
listed on court papers that presented Manzo as a Capstone
Kaye Scholer said most of its partners did not know that
Manzo was actually a contractor, while Solow, who saw a draft of
the employment contract, "did not remember" its details.
Capstone, for its part, admitted in court papers on Monday
that executive director Edwin Ordway "incorrectly" presented
Manzo as an "employee."
But the firms also noted that GSC's eventual sale to lender
Black Diamond Capital Management, which fetched $235 million,
"No creditor was hurt by Capstone's efforts in this case,"
Capstone said in court papers.
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. In the
case of GSC, which went bankrupt in August 2010, Manzo was in
charge of liquidating certain of the company's assets in the
wake of its sale.
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.
He has earned about $4 million in the case, more than half
of Capstone's total bills, court papers show.
But Manzo said in a court filing on Monday that fraud was
not his intention.
He joined Capstone as a contractor, rather than employee,
partially to avoid potential "awkward relationships" associated
with reporting to people who had previously reported to him, he
Capstone's partners had previously worked for a firm Manzo
had started, and Manzo said he thought it would be "best for
and best for me" if he neither reported to, nor
directly managed, those partners at Capstone.
If he had thought the arrangement would impose "a series of
additional obligations on himself, ... he would have used
another term to describe" it, his lawyers, from Willkie Farr &
Gallagher, said in court papers.
GSC, founded by former Goldman Sachs Group Inc
partner Alfred Eckert III, went bankrupt in the wake of a
liquidity squeeze and declining asset values brought on by
global recession. Black Diamond acquired its assets in 2011.
Black Diamond, as well as certain GSC creditors, have
supported the Trustee's effort not only to strip the firms of
the roughly $10 million already collected, but bar Capstone from
attaining its requested $2.75 million success fee, $1.65 million
of which would go to Manzo.
A hearing on the matter is set for Feb. 11.
The case is In re GSC Group Inc et al., U.S. Bankruptcy
Court, Southern District of New York, No. 10-14653.