Kamensky was outraged. Within minutes of learning that Jefferies was the competing bidder, Kamensky contacted representatives of Jefferies through a series of texts and Bloomberg chat messages to “stand DOWN,” “DO NOT SEND IN A BID, ” and even threatened to use his position as co-chair of the Committee to prevent Jefferies from bidding on MyTheresa’s shares. Worse, Kamensky leveraged Marble Ridge’s ongoing business relationship with Jefferies to provide the investment bank’s representatives an ultimatum: Cease all efforts to bid on MyTheresa’s equity, or Marble Ridge would cease doing business with Jefferies and they would no longer be partners moving forward. Jefferies never placed a bid on the preferred equity and disclosed to the Committee that its decision was a result of Kamensky’s demands.
Unfortunately, that disclosure prompted Kamensky to make a bad situation even worse. On July 31, 2020, Kamensky contacted a Jefferies’ representative and demanded to know why the investment bank disclosed their discussions to the Committee. Kamensky stated that if Jefferies continued to cooperate with the Committee, “I’m going to jail, okay? Because they’re going to say that I abused my position as a fiduciary, which I probably did, right? Maybe I should go to jail. But I’m asking you not to put me in jail."He then urged Jefferies to take part in the bidding process, and in an apparent attempt to undo the harm, stated to the representative that the “conversation never happened.”
The end of the story did not bode well for Marble Ridge or Kamensky. On August 5, 2020, the bankruptcy court charged the United States Trustee with conducting an investigation. The bankruptcy court found that “the substantial evidence collected to date clearly demonstrates that … Kamensky breached his fiduciary duty to unsecured creditors on July 31 … After being told of the existence of a rival bid and the identity of the bidder, Mr. Kamensky sought to exploit that information for his benefit by contacting Jefferies and pressuring them to withdraw their initial bid, to the likely detriment of all other creditors.”
On August 20, 2021, Marble Ridge notified investors of its plan to wind down its funds and liquidate over $1 billion in assets under management. On September 3, 2020, Kamensky was arrested and charged for fraud during the offer or sale of securities, bribery, and obstruction of justice. On February 3, 2021, Kamensky pled guilty to one count of bankruptcy fraud and thereafter was sentenced to serve six months in prison.
As for MyTheresa, the preferred shares were distributed directly to unsecured creditors, and on January 25, 2021, MyTheresa had an initial public offering. Since then, the shares have traded in excess of $35 a share—a far cry from the $0.20 offer that Marble Ridge initially made.
Part III: Conflict—You Cannot Avoid It
Kamensky’s fate could have been avoided. And this article is in no way intended to suggest that Committee counsel did anything wrong here. The reality is that Kamensky simply failed to play by the rules and failed to follow what the committee bylaws likely required. Kamesnky could have disclosed his intentions to the committee counsel before taking any action in connection with the bidding process. Better yet, as soon as Kamensky determined he had an interest in potentially participating, he could have resigned from the Committee altogether. Of course, we know he did neither.
Plainly, the role of Committee counsel can be very challenging. In order for a Committee to effectively fulfill its duties in a case, members should have full and complete access to information concerning the debtor’s affairs. That information invariably includes confidential information that could be misused for competitive or operational reasons. In this regard, the role of Committee counsel contemplates the identification, management, and resolution of conflicts of interest in real time and on a proactive basis. This requires counsel to anticipate, identify, and resolve conflicts in the ordinary course. This challenge in turn requires counsel to have in place restrictions and procedures to mitigate the temptation for possible self-dealing by members.
The interests of an individual member, the Committee, and the creditor class as a whole may not always align. While the collective goal of value maximization will generally encompass the interests of members, participation on a committee is generally driven by self-interest. Committee counsel must be mindful of these competing interests, as the engagement will often extend far beyond the normal role of an advocate. Counsel will wear a number of hats as an educator, advisor, and intermediary of Committee and inter-creditor disputes. And to succeed in this regard, counsel must effectively anticipate and manage potential conflicts, including the following best practices.
Committee Governance. Committee counsel should immediately draft and implement Committee by-laws to address and manage conflicts of interest. The by-law provisions should:
(1) impose upon each member a continuing obligation to disclose any and all prior connections with the debtor and other parties in interest, all economic interests related to the Debtor, including claims, ownership interests, competitive interests, and contracts, as well as any actual or potential conflicts that may arise;
(2) include limitations on access to information that may potentially serve any of the potential conflicts or competing interests;
(3) delineate procedures to vet and select a chairperson; and
(4) provide for exclusion of a member from Committee participation on any matter on which the member is determined to have an actual or potential conflict of interest, provided that the member can take independent action that does not result in a breach of any fiduciary obligation as a Committee member (in which case that member should resign from the Committee).
Under the guidance of counsel, the Committee must insist upon complete disclosure of the nature and components of each member’s claims and other interests related to the debtor. Should the Committee fail to provide a procedure for members to assert their individual positions and differentiate those actions from measures undertaken by the Committee, the fiduciary duties of all of the members may be compromised.
Voting Procedures. Bylaws of the Committee should also address voting procedures as soon as possible after committee formation. These procedures should include vehicles for breaking ties, particularly where one or more members must abstain. The challenge is anticipating what changes will occur of the course of the case. In many instances, the dynamics of the Committee can quickly shift. For example, with larger committees appointed in cases that run longer, some members may become less active or entirely inactive as the case progresses. The potential for misconduct or abuse of the Committee process can increase as inactive members are asked to vote on critical issues, perhaps regarding plan formulation, about which they may be less informed and more reliant on other members or counsel. As a safeguard to limit this potential for abuse, most creditors’ Committees prohibit voting by proxy and may implement a minimum quorum to vote on substantive matters at meetings.
Protective Orders. In most cases, the debtor requires the Committee and its members to execute a confidentiality agreement or protective order concerning the disclosure of non-public information. Protective or confidentiality orders generally prohibit disclosure, use or dissemination of non-public information obtained through Committee membership. The information provided to the Committee, either from non-public sources or from analyses by the debtor’s or Committee’s professionals, as well as the deliberations of the Committee, must be kept in strict confidence. And the level of scrutiny and restriction must be heightened in the circumstance of a committee member conflict. It is not enough to simply have the member abstain from voting; the bylaws should require the withholding of confidential information, deliberations, and even the final votes from those committee members who are forced by conflicts to abstain. Strict compliance with confidentiality restrictions encourages the free-flowing production and sharing of information between the debtor and Committee, which is necessary to facilitate a successful and ideally consensual reorganization.
Moreover, a confidentiality agreement or protective order may heighten the members’ awareness of the appropriate (and inappropriate) uses (or misuses) of information and the need for limiting disclosure to properly conduct the tasks of the Committee. The confidentiality agreement or protective order will generally restrict the members’ use of confidential information acquired only through the Committee membership. But cases can move quickly, and thus members who fail to sign the confidentiality agreement must be excluded from disclosures and discussions involving confidential Committee information until they sign. The early stages of a committee appointment are ripe for lax enforcement and abuse, but the beginning is the best time to make clear the importance of strict compliance.
Part IV: Key Takeaways
The representation of Committees in bankruptcy proceedings will almost always involve the management and control over a free flow of information between and among the debtor, Committee members, and the Committee’s professionals. For Committee counsel, that information should include early and ongoing disclosure by all members of their interests and connections in the debtor and the proceedings. In the course of service on the committee, members will invariably encounter confidential information that could be used to their own benefit or to other’s detriment. Committee counsel must anticipate and implement appropriate safeguards to manage and resolve these potential conflicts before they occur. Practitioners representing Committees should be acutely aware of the inevitability of the conflicts that arise when members receive proprietary information during the course of a case. Under those circumstances, Committee counsel and members should look to their governance documents and conscience for guidance. Put clear procedures in place, enforce those procedures strictly, and always, always err on the side of caution.