In a settlement aimed at resolving claims brought by the U.S. Trustee’s Office that it omitted key details when it applied—and was chosen—to work on the 2010 bankruptcy of investment firm GSC Group, Kaye Scholer agreed late last week to return nearly a third of the $5 million it earned for the assignment.
The U.S. Trustee’s Office, a branch of the U.S. Department of Justice that oversees the bankruptcy process, had argued in a January 4 motion that Kaye Scholer and GSC financial adviser Capstone Advisory Group should be terminated and forced to return all fees they had received from the bankrupt investment firm’s estate. In its filing, the trustee’s office argued that both Kaye Scholer and Capstone had failed to disclose that an employee listed on Capstone’s application was actually a contractor using a type of fee-sharing agreement barred by the bankruptcy code. The trustee’s office also faulted Kaye Scholer for failing to disclose that it had previously done work for other ventures owned by the contractor, Robert Manzo, who served as GSC’s chief restructuring officer.
"The bankruptcy system must be protected from failures by the very professionals upon whose integrity the Court and other parties rely," an attorney with the U.S. trustee wrote in the filing.
Responding to the trustee’s allegations in a court filing of its own on January 28, Kaye Scholer acknowledged that "mistakes were made" and that the disclosures at issue had been omitted or inaccurate. "But any errors attributable to Kaye Scholer were not intentional," the firm argued, adding that the "severe sanctions sought against the firm are not warranted." The firm also insisted that the omissions did not result in Capstone receiving any more in fees than it otherwise would have, and that Kaye Scholer had added significant value to the GSC estate by, among other things, helping it earn $235.7 million in an asset auction that began with an initial $5 million stalking horse bid.
As part of the settlement agreement [PDF], Kaye Scholer has agreed to return $1.15 million of the more than $5 million in fees it earned for its work on the case, as well as to forgo a pending application for $352,000 in fees the firm has not received. The U.S. trustee made details of the settlement public in a February 15 filing in U.S. bankruptcy court in Manhattan. The settlement requires the court’s approval.
In resolving the matter, New York–based Kaye Scholer also agreed to undergo an examination of the firm’s business acceptance and retention application policies with the help of an outside consultant. Unlike a settlement the trustee’s office reached February 11 with Capstone and Manzo, the agreement the law firm struck does not require an outside monitor to audit any policy changes it makes as a result of that examination. (Capstone also admitted in its settlement that it had made the initial error in the disclosure about Manzo’s contractor status.)
In a statement, Aaron Rubinstein, chair of Kaye Scholer’s risk management committee, said the firm has "an ongoing commitment to improve our internal procedures and processes." The firm’s bankruptcy and restructuring cochair, Mark Liscio, added in a statement of his own that from Kaye Scholer’s perspective, the settlement ends the matter and reaffirms "the professional standards that have always guided our firm." Michael Solow, Kaye Scholer’s managing partner, is listed in court documents as the most senior lawyer from the engagement.
The firm began working for GSC a month and a half before it filed for Chapter 11 protection on August 31, 2010. Susan Golden, the U.S. trustee trial attorney listed in the settlement filing, did not respond to a request for comment Tuesday.