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15th May 2022

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Hedge fund executive sentenced to 6 months in prison for bankruptcy fraud

A prominent US hedge fund manager has been sentenced by a New York federal judge to six months imprisonment for his misconduct during the 2020 bankruptcy of luxury retailer Neiman Marcus.

Dan Kamensky, the founder of Marble Ridge Capital, pleaded guilty in February to a single count of bankruptcy fraud related to his efforts to improperly secure a portion of $172m that had been allocated to Neiman’s unsecured creditors.

Kamensky appeared at a socially distanced court hearing on Friday for his sentencing wearing a dark suit, accompanied by his lawyer Joon Kim and a small group of supporters including his wife and in-laws.

Kamensky’s pre-dawn arrest at his suburban New York home by the Federal Bureau of Investigation in September sent shockwaves through the distressed debt and corporate law communities. New York prosecutors had originally charged Kamensky with four counts including fraud, extortion and obstruction of justice.

The Georgetown-educated former corporate lawyer, a Neiman bondholder, had led a long-shot yet ultimately successful effort to get Neiman’s private equity owners to settle claims that they had improperly transferred a valuable asset, online retailer MyTheresa, out of creditors’ reach in 2019 before Neiman filed for bankruptcy.

In July, Neiman’s private equity owners, Ares Management and the Canadian Pension Plan Investment Board, agreed to grant preferred shares in MyTheresa to settle claims that the transfer had been fraudulent. 

Kamensky, who co-chaired an official committee of creditors, offered to buy some of those illiquid shares for 20 cents on the dollar from fellow claimants who wanted immediate cash.

He has admitted that he became enraged when investment bank Jefferies tried to buy those claims at a higher price, explaining that he had spearheaded the fight against the private equity firms over several years.

“Nothing can change what happened that day or excuse the things I said,” Kamensky told Judge Denise Cote on Friday. “I made grave and terrible mistakes.”

A subsequent investigation by the US trustee’s office, an affiliate of the justice department, revealed that Kamensky told Jefferies to stay away, sending a Bloomberg chat message to the firm’s banker saying “DO NOT BID” and later threatening to stop doing business with the bank.

In a later conversation recorded by a Jefferies executive, Kamensky appeared to realise he may have breached his fiduciary duties to fellow creditors, and pleaded with the banker to avoid implicating him: “I’m asking you not to put me in jail.”

“He tried to rewrite history,” Cote said on Friday. “He tried to get another person to lie for him. He tried to obstruct justice.”

Confronted with the evidence of his pressure campaign, Kamensky quickly admitted his wrongdoing. He eventually shut down Marble Ridge and reached a settlement in bankruptcy court separate from the criminal charges.

Kamensky’s lawyers had argued that he should be spared prison, writing in court filings that his misdeeds “happened almost instantaneously and did not involve any premeditation or planning”, and that he had “reacted in moments of intense stress and pressure in a way that he should not have”. 

He said he believed that unsecured creditors were ultimately unharmed when Jefferies eventually bid for the MyTheresa securities. Kamensky submitted more than 100 letters of support from family, friends and business associates, and said his health would be endangered by a Covid outbreak in prison.

In recent months he has been lecturing at law and business schools about the ethical lessons from his ordeal in the Neiman case.

Federal prosecutors had argued that sentencing guidelines called for a 12-18 month prison term. They wrote that “a custodial sentence in this case will send the message to those who participate in the bankruptcy process that they must play by the rules and ensure the fairness of the proceedings for all stakeholders”.

But Cote ruled that a shorter prison term was sufficient, imposing a six month prison term follows by six months home detention and a fine of $50,000.

The US trustee added in a separate filing that “[t]he harm that resulted from Kamensky’s abuse of the bankruptcy system cannot be overstated”.

2021-05-07 16:32:08

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By admin