Dan Kamensky, the founder and principal of the prominent hedge fund, Marble Ridge Capital LP and Marble Ridge Master Fund LP (“Marble Ridge”), was arrested on Thursday, September 3, 2020, by the FBI, the most recent development in a dramatic chain of events in the Chapter 11 proceedings of retailer Neiman Marcus. According to the U.S. Attorney’s Office for the Southern District of New York, Kamensky’s criminal charges stem from his attempt to pressure a rival bidder to abandon its higher bid for assets in the Neiman Marcus bankruptcy – which would have allowed Marble Ridge to purchase the assets at a lower price – and then pressuring the rival to cover up the scheme. Mr. Kamensky faces one count each of securities fraud, wire fraud, extortion, and obstruction of justice. If convicted, Mr. Kamensky faces up to 50 years in prison. Also on September 3, the Securities and Exchange Commission filed a civil complaint against Mr. Kamensky alleging violations of the federal securities laws and seeking permanent injunctive relief and civil money penalties. Mr. Kamensky appeared in federal court yesterday afternoon, at which the terms of his pretrial release were set, including a $250,000 bond. At the time of this article, a spokesman for Mr. Kamensky has declined to comment.
The charges against Mr. Kamensky stem from his admitted misconduct as the co-chair of the unsecured creditors committee (UCC) in the Neiman Marcus Chapter 11 bankruptcy case, which had already resulted in Marble Ridge’s resignation from the UCC, the wind-down of Marble Ridge, an expedited investigation by the Office of the United States Trustee regarding Marble Ridge’s conduct and, at the prodding of the Neiman Marcus bankruptcy judge, a lawsuit against Marble Ridge filed by the debtors. These events, as described in further detail below, are a cautionary tale and a reminder of the serious responsibilities of serving as a member of an official creditors’ committee and are sure to be of interest to distressed investors as they unfold.
Resignation of Marble Ridge From the Neiman Marcus UCC:
On August 1, 2020, Mr. Kamensky resigned as co-chair of the Neiman Marcus UCC. The resignation, publicly disclosed in an August 4, 2020 filing, was followed by an August 5, 2020 order — entered by Judge David R. Jones of the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”) — which revealed that the UCC’s counsel had filed a letter under seal identifying concerns about the actions by Marble Ridge and Mr. Kamensky prior to Mr. Kamensky’s resignation. Although the letter was filed under seal, the crux of its message has now become public: counsel to the UCC detailed information that Mr. Kamensky had pressured a potential bidder for Neiman Marcus assets not to bid so as to protect the potential investment in those assets by Marble Ridge.
The Bankruptcy Court’s reaction to these allegations unfolded forcefully. Judge Jones directed the U.S. Trustee to file a statement regarding the conduct of Marble Ridge and Mr. Kamensky from the time of their appointment to the UCC. As first described in the U.S. Trustee’s report, filed August 19, 2020, and echoed in the adversary proceeding brought by the debtors, Mr. Kamensky engaged in conduct on July 31, 2020 that the U.S. Trustee deemed “paradigmatic examples of a breach of a committee member’s duties,” as well as other problematic conduct from July 4 through July 30, 2020.
U.S. Trustee’s Report Details Serious Allegations of Misconduct:
The alleged improper conduct of July 31, 2020 refers to Mr. Kamensky’s actions in response to learning that investment bank Jefferies Inc. was considering a bid to purchase 140 million Series B Shares that were to be distributed to Neiman Marcus’ unsecured creditors as part of its plan of reorganization – a bid that would compete with that of Marble Ridge. As described by the U.S. Trustee, Jefferies’ bid had the potential “to produce a higher return for unsecured creditors than the pending offer from Marble Ridge.” The report states that, in response to learning this news, Mr. Kamensky engaged in a series of text and Instant Bloomberg chat messages about the Jeffries bid, in which Mr. Kamensky urged Jefferies to “stand DOWN” and “DO NOT SEND IN A BID.” The report also alleges Mr. Kamensky sent communications that threatened “a possible termination of the business relationship between Marble Ridge and JE1’s section of Jefferies to pressure JE1 to drop the bid.”
The U.S. Trustee’s report also reports that Mr. Kamensky called a contact at Jefferies, and began the call by stating “this conversation never happened.” Upon hearing this, the Jefferies contact began recording the call, resulting in a transcript that further documents Mr. Kamensky’s actions. In the call, Mr. Kamensky urged Jefferies to bid, stating his fear that “otherwise the U.S. Attorney is investigating this. . . ” and admitting he likely breached his fiduciary obligations to the UCC: “[I]f you’re going to continue to tell them what you just told me, 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?” The U.S. Trustee also reported that “Mr. Kamensky admitted that contacting and trying to influence a potential rival bidder for property of the bankruptcy estate was wholly inappropriate and a grave mistake.”
Consequences Following the U.S. Trustee’s Report:
After the U.S. Trustee’s report was filed on August 19, Judge Jones told the parties in the Neiman Marcus case that he intended to take the matter seriously. On August 21, Judge Jones said that he would issue an order requiring Marble Ridge to explain its conduct in light of the U.S. Trustee’s report. That same day, a spokesperson for Marble Ridge announced the company was “winding down,” prompting speculation about the impact to the pending bankruptcy case. During a conference the following Monday, Judge Jones said he had been “anticipating and waiting” for the debtors’ next steps and would tailor his order accordingly. The debtors, heeding this warning, commenced an adversary proceeding against Marble Ridge, and sought a TRO on Wednesday, August 26, 2020.
The Debtors’ Temporary Restraining Order:
In their application for a TRO, the debtors sought an order requiring Marble Ridge to deposit $55 million into an account that would be available to pay damages to Neiman Marcus. The adversary proceeding also seeks compensatory damages and attorneys’ fees, a fine of at least $5 million to deter future misconduct, and an order subordinating all of Marble Ridge’s claims below the claims of general unsecured creditors.
A hearing on the TRO was held on August 27, 2020 at which Judge Jones expressed apparent contempt for Mr. Kamensky’s actions, describing the conduct as “more troubling than anything” he has seen and further stated “I have more than a colorable case [before him] that there have been intentional violations of applicable criminal and civil law that govern bankruptcy proceedings.” The judge went on to say Mr. Kamensky “has stuck his toe in my pond and done something horribly wrong,” referring to him as a “cheater” who he would not allow to “taint my process.” After Judge Jones paused the hearing, Marble Ridge consented to the TRO and agreed to place the $55 million in funds in escrow. A hearing on the preliminary injunction is scheduled for September 18, 2020.
During the TRO hearing, Judge Jones acknowledged the criminal implications for Mr. Kamensky, admonishing his legal team that “[t]he passage you all are on, you’re going to put his freedom at risk.” In a statement, FBI Assistant Director-in-Charge William F. Sweeney specifically pointed out Mr. Kamensky’s breach of duty to the UCC, stating:
“As alleged, Kamensky intentionally violated his fiduciary duty as a member of the Official Committee of Unsecured Creditors in the Neiman Marcus bankruptcy by preventing the sale of securities to an investment bank so he could acquire the same securities at a significantly lower price for his own fund. In a conversation with an employee of the investment bank, Kamensky went as far as to say, ‘Maybe I should go to jail.’ Today, we’ve removed the ‘maybe,’ and forced him to answer for his conduct.”
Further criminal liability may also result if the U.S. Attorney’s office determines to bring additional charges alleging that Mr. Kamensky’s conduct had a chilling effect on the bidding in the Neiman Marcus case. If the Bankruptcy Court finds that Mr. Kamensky’s actions are particularly egregious, it may also nullify his indemnification by Marble Ridge for any damages assessed against him personally. The Bankruptcy Court directed the U.S. Trustee to conduct a more complete investigation, which may yield further allegations and expose Mr. Kamensky and Marble Ridge to further liability.
Takeaways for Future Creditor Committee Members:
Judge Jones’ admonishments and the criminal charges brought against Mr. Kamensky underscore the importance of honoring the obligations of serving on a creditors’ committee. Those invited to this position of privilege bear a fiduciary duty of loyalty to the unsecured creditor class they represent. Breach of a fiduciary duty, when committed in the bankruptcy context, subjects the transgressor to the equitable remedies of the bankruptcy court. This can translate to the severe consequences looming in the pending Neiman Marcus case, also seen in the 2003 case Citicorp Venture Capital, Ltd. v. Comm. of Creditors Holding Unsecured Claims, wherein Citicorp Venture Capital, Ltd. (“CVC”), an insider and fiduciary of the debtor Papercraft Corporation, was alleged to have engaged in self-dealing by, inter alia, secretly purchasing over $60 million in discounted claims against the debtor and failing to disclose the purchases to the creditors’ committee. In that case, the committee commenced litigation seeking equitable subordination of CVC’s claims pursuant to § 510(c) of the Bankruptcy Code, which relief was ultimately granted by the bankruptcy court and affirmed by the Third Circuit.
As long as this duty is upheld, unsecured creditors can enjoy the privileges of serving on a creditors’ committee, which include a prominent seat at the negotiating table and an influential role in the ultimate recovery on unsecured claims and long-term business strategy of the company. Moreover, the fees and expenses of the committee (including the costs of attorneys and financial advisors) are borne by the bankruptcy estate, and not by the individual creditors. Creditors selected to the committee should take care in selecting seasoned counsel who will assist them in navigating all duties and obligations to maximize their enjoyment of these privileges while limiting exposure to liability.
For more information on this alert or other restructuring & bankruptcy matters please contact:
 A. Scurria, “Hedge Fund Founder Arrested Over Neiman Marcus Asset Bid,” The Wall Street Journal (Sept. 3, 2020, 1:56 P.M.); “New York Hedge Fund Founder Arrested And Charged With Fraud, Extortion, And Obstruction Of Justice In Connection With Neiman Marcus Bankruptcy,” Department of Justice, U.S. Attorney’s Office, Southern District of New York (September 3, 2020).
 SEC v. Daniel B. Kamensky, Case No. 1:20-cv-07193 [ECF 1].
 In re Neiman Marcus Group Ltd. LLC, et al., No. 20-32519 (DRJ) (Bankr. S.D. Tex.) (“Neiman Marcus”).
 Neiman Marcus, Dkt. No. 1432 at ¶ 14; Ex. 1.
 Neiman Marcus, Dkt. No. 1442.
 Mariposa Intermediate Holdings LLC, et al. v. Marble Ridge Capital LP, et al., Adv. Pro. No. 20-03402 (Bankr. S.D. Tex.) (“Mariposa”), Dkt. No. 2.
 Neiman Marcus, Dkt. No. 1485 at p. 30.
 Neiman Marcus, Dkt. No. 1485 at 10-11.
 Id. at 11.
 Dkt. No. 1485 at 13-14 (capitalizations in original).
 Dkt. No. 1485 at 16.
 Dkt. No. 1485 at 21.
 Dkt. No. 1485 at 22.
 Dkt. No. 1485 at 15.
 A. Scurria & A. Gladstone, “Hedge Fund Marble Ridge to Close After Scathing Neiman Report,” The Wall Street Journal (Aug. 21, 2020, 12:33 P.M.).
 Mariposa, Dkt. No. 1.
 Mariposa, Dkt. No 1. at ¶ 8.
 In re Rickel & Associates, Inc., 272 B.R. 74, 99 (Bankr. S.D.N.Y. 2002) (“The Committee and its members owed a fiduciary duty to the class they represented, but not to the individual creditors within the class or to the estate. . . . As fiduciaries, they were required to be honest, loyal, trustworthy and without conflicts of interest.”); In re Refco Inc., 336 B.R. 187, 198 n.13 (Bankr. S.D.N.Y. 2006) (“[A] Committee member’s fiduciary duties do not preclude it from representing its own interests, provided that in so doing it does not abuse its position on the Committee at the expense of the creditor class.”).