Do they teach ethics in law school? Of course, they do. It is simply that unethical behavior can rear its ugly head no matter the prior training or high-profile of the individual. This case is surprisingly sleazy given that it is focused on the bankruptcy of one-time fashion icon Neiman Marcus.
Enter Daniel Kamensky
Daniel Kamensky is a lawyer and the founder of Marble Ridge Capital LP, a New York hedge fund. He is charged with wire fraud, extortion and bribery related to bankruptcy, obstruction of justice and, of course, securities fraud. For the founder of a successful hedge fund to be charged with those crimes is tantamount to him being a pariah to the investment community.
Despite his credentials, Kamensky’s scheme was not all that sophisticated.
The fraud began July 31, 2020, when Kamensky stood at the crossroads of choices and consequences.
Kamensky’s firm specializes in what is known as distressed goods investing. The thought behind the profits being that a business goes bankrupt, a wealthy investor comes in and bids pennies on the dollar, and then the successful bidder re-sells the goods for a higher price.
We’ve all seen (or shopped at) classic “Going-Out-of-Business” sales. In the case of Neiman Marcus this involved hundreds of millions of dollars in goods, store fixtures, warehouse facilities and much more. As Neiman was publicly traded on the stock exchange, they weren’t so much bidding on the goods, per se, but on shares. Same principle just different ways of selling off assets.
When a business such as Neiman goes through such bankruptcy there are naturally powerful bidders with millions, if not billions in assets that have the ability to purchase and re-sell the goods through intermediaries. Kamensky’s hedge fund, Marble Ridge, had $1.2 billion of assets as of the end of 2019.
Kamensky’s firm bid about 10 cents per share. They were outbid by an investment bank at 30 cents per share.
Going back to July 31, 2020, Marble Ridge “pressured” the rival bidder not to bid against them. How did he pressure them? According to the U.S. Department of Justice, Kamensky “threatened to use his role as co-chair of the retailer’s official committee of unsecured creditors to block the higher bid, and stop doing business with the bank unless it backed off.”
He threatened the bank in no uncertain terms and the bank withdrew its bid.
What Kamensky did, of course, is absolutely illegal and worse, he knew it.
A Crook and an Honest Employee
When the rival bidder withdrew its higher bid, Kamensky realized that the retailer’s committee of unsecured creditors (the people owed money) and the legal system would want to know why. Here is where the fraudster tried to get an employee to cover for him. Unfortunately for Kamensky, the telephone call was recorded.
Kamensky wanted the employee to lie for him, saying that the investment bank was really not serious about their 30 cents a share offer. They were. Here is what law enforcement heard:
“Do you understand … I can go to jail?” Kamensky said.
“I honestly … don’t want anything to do with this,” the employee responded.
“My position … is going to be look, this was a huge misunderstanding. They’re going to say that I abused my position as a fiduciary, which I probably did, right?”
After he was caught, Kamensky regretted the conversation as a terrible mistake and a lapse of judgment. He was right on both counts.
The U.S. Securities and Exchange Commission filed related civil charges and Kamensky paid $250,000 in bail money. He is currently awaiting trial.
“I Know I’m Being Unethical”
The core of this case is that Kamensky, a lawyer, knew he was being unethical and he went ahead and essentially bullied a rival bidder. He used his position on the committee to threaten the bank, pressuring the bank into believing that he would block their ability to do business with the unsecured creditors.
There was an absence of oversite in a sense. The Marble Ridge hedge fund was low bidder, and founded by Kamensky and he also sat on the board administering the assets of the bankruptcy. By pressuring the investment bank to withdraw its bid, he would be the sole bidder.
His need for money through these tactics would be assured. While 20 cents per share may not sound impressive, given the billions in assets involved, Kamensky looked to make a fortune from this transaction.
What was his rationale for his bribery? How did he justify it? The simple answer is: “Because he felt he could.”
He had lost all sense of ethics and in essence lost himself. Even the unnamed employee wanted no part of it. Ethical training in law school is a fine concept, but unless it is annually reinforced, it can often become pushed aside.
Kamensky will now pay the price just as he feared he might. He has no one to blame but himself.
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