December 16, 2013 / 11:46 PM / in 4 years

Capstone's fees cut over GSC disclosure saga

NEW YORK, Dec 16 (Reuters) - A judge cut the fees of financial adviser Capstone Advisory Group by about $1.57 million on Monday for its work on the bankruptcy of GSC Group Inc, saying it withheld information about a relationship with one of its contractors.

The ruling, entered in U.S. Bankruptcy Court in Manhattan, brings to a close a nearly year-long saga over how bankruptcy professionals handled GSC’s insolvency and eventual sale to Black Diamond Capital Management.

Judge Shelley Chapman said Capstone should have disclosed that Robert Manzo, the restructuring expert who helped sell and liquidate GSC’s assets, was working as a contractor rather than a direct employee of Capstone.

However, Chapman said the relationship itself, and the associated fee-sharing arrangements between Capstone and Manzo, did not violate bankruptcy rules, a blow to Black Diamond, which had accused Manzo of gross negligence.

Still, Capstone ran afoul of disclosure requirements under bankruptcy law by failing to reveal the relationship, Chapman said. The fee cut represents about a 25 percent reduction from the $6 million or so Capstone had initially sought.

Chapman’s decision also carried implications for Manzo, law firm Kaye Scholer and Black Diamond itself, as well as the U.S. Department of Justice, all of which Chapman deemed to have made mistakes in handling the messy dispute over Manzo’s status.


GSC, an investment management firm 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. It sold its assets to Black Diamond in 2011 for $235 million.

It tapped Kaye Scholer and Capstone as legal and financial advisers, respectively. Manzo, the trustee in charge of liquidating GSC assets after the sale, was listed by Capstone as an employee.

But in January 2013, the DOJ’s bankruptcy watchdog, the U.S. Trustee Program, cried foul, saying Manzo was actually an independent contractor with whom Capstone had signed a fee-sharing agreement.

Bankruptcy laws prohibit most cases of fee-sharing out of concern that firms might inflate their fees to make up for the cost of sharing. Also, independent contractors are required to make certain disclosures to avoid the appearance of conflicts of interest.

Tracy Hope Davis, the U.S. Trustee at the time for the New York area, called for the firms to be removed from the case for failing to disclose the relationship, and to give back about $10 million in total fees.

It was a highly publicized case for the Trustee Program, which had made curbing high professional fees a priority.

In February, the U.S. Trustee reached settlements with Manzo, Kaye Scholer and Capstone, only to have Black Diamond object that overly broad legal releases would prevent it from bringing its own claims in the future.

A second settlement attempt fell apart in April over confusion about whether the deal required Chapman’s approval.

During one court hearing, Chapman told Davis the Trustee’s office had behaved like a “first-year law student,” in a rare public rebuke of a government official by a federal judge.

Davis has since relocated to the Trustee Program’s San Francisco office, a move some lawyers have speculated was connected to the GSC saga. A spokeswoman for the Trustee Program, however, said Davis’ move was unrelated.

Cliff White, the director of the DOJ’s Trustee Program, said his office was “pleased” with Chapman’s ruling. “These results are highly uncommon in large Chapter 11 cases,” White said in a statement.


Earlier this year, Kaye Scholer and Manzo reached settlements with Davis, Kaye Scholer agreeing to cut $1.5 million from its fees and review its disclosure policies, and Manzo agreeing to resign from the case. Davis maintained claims against Capstone, while Black Diamond asserted claims against all three, sending the matter to trial in April.

Chapman’s decision on Monday resolved the trial, though parties can still appeal. Imposing fee cuts against Capstone, Chapman said the company’s attitude fell “somewhere on the continuum between lackadaisical and arrogant.”

“It is up to the court, and not the professionals, to decide such disclosure issues,” Chapman said in a 126-page ruling.

Capstone had maintained from the outset that there was nothing untoward about its arrangement with Manzo. Chapman, while faulting Capstone for failures of disclosure, agreed that the arrangement was proper, saying Manzo functioned as a member of the firm.

But that only reinforces the importance of disclosure, said George Kuney, a professor at the University of Tennessee at Knoxville’s College of Law.

“You can get away with all kinds of things, even things that seem like they might pose a threat to the system, if the circumstances warrant them and you disclose them,” Kuney said in an interview with Reuters on Monday. “The same things, if not disclosed, will get your fees cut.”

The key in bankruptcy litigation, Kuney said, is “Disclose, disclose, disclose.”

Chapman ripped Black Diamond for its request for additional sanctions against the three parties, calling it “far more unbecoming than anything done or not done by Mr. Manzo, the Capstone professionals, or Kaye Scholer.”

“Enough is enough,” Chapman wrote, denying the requests.

Aaron Rubinstein, a Kaye Scholer partner who worked on the GSC case, told Reuters the firm is satisfied with Chapman’s ruling, which protects it from future malpractice claims from Black Diamond.

Rubinstein said that the ruling means his and other firms will err on the side of full disclosure.

“This is just another form of guidance as to what side of disclosure people should be on,” Rubinstein said.

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