July 26, 2005
Potential Conflict Problem for Bankruptcy Law Firm
eToys Inc. was one of the many dot.com companies that flamed out once business reality set in, and it filed for bankruptcy in 2001 in Delaware. Well-known bankruptcy attorney Paul Traub (of Traub, Bonacquist & Fox in New York) recommended to the Delaware Bankruptcy Court that Barry Gold be appointed CEO to oversee the liquidation of the company. Traub represented eToys creditors in the bankruptcy. Unfortunately, what was not disclosed at the time is that just a short time before that recommendation, Traub and Gold formed a company, Asset Disposition Associates, a liquidation company. Although their company did not have any dealings with the eToys bankruptcy, the business relationship is something that would usually be disclosed to the bankruptcy court. An article in the Wall Street Journal (here) discusses the case, including a motion by the bankruptcy trustee seeking the return of $750,000 in fees paid to Traub's firm for its work on behalf of creditors.
The article also notes that the "Three Amigos" of investigations -- the SEC, DoJ, and NY Attorney General's Office (i.e. Eliot Spitzer) -- have been in touch with individuals involved in the bankruptcy. While bankruptcy is usually a world of its own, bankruptcy fraud cases against lawyers for failure to disclose conflicts of interest have been brought. Among the most well-known, especially to the New York bar, is the prosecution and conviction of John Gellene (then of Milbank Tweed), who failed to disclose his representation of a creditor of a bankrupt company (182 F.3d 578 (7th Cir. 1999). Unlike other types of fraud, in which the government usually must prove a gain to the defendant and some loss by the victim, in bankruptcy fraud cases the harm can be to the court and the bankruptcy process from a failure to disclose, without the need to prove any monetary harm. For those interested in the Gellene case, an outstanding book that uses the prosecution as a starting point for a discussion of conflicts in the world of corporate law and finance is Eat What You Kill: The Fall of a Wall Street Lawyer by Prof. Milton Regan at Georgetown University Law Center. (ph)
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