Meet Mr. Fixit
Big fees and campaign gifts dog a bankruptcy guru
At Polaroid, Cooper's firm advised the photography pioneer to declare bankruptcy. Shareholders and retirees have sharply questioned that decision. In June 2002, investment bankers, working with Cooper's firm, sold the assets at auction. Because of concerns that the assets were undervalued, a court-appointed examiner is investigating the sale for indications of fraud. Critics say the assets were sold for a net price of only $24 million.
At Colt Manufacturing, a judge refused in 1994 to approve nearly $800,000 in fees that Cooper's firm was to receive from the Hartford, Conn., gun maker--this after Cooper acknowledged he did not disclose a personal investment in an equity fund that sought to buy Colt.
At Malden Mills, a bankruptcy judge called Zolfo Cooper's appointment "troubling." The judge cited a possible conflict--the financial ties between Zolfo Cooper and a large mill creditor that had pushed for the appointment.
At Enron, the Securities and Exchange Commission took the unusual step of intervening to protest Cooper's employment contract and his business conflicts. A group of institutional investors also objected to the size of his fees and other terms in his contract. Cooper cut his fees and revised his terms.
Cooper, defending his actions, says he has managed hundreds of troubled companies in the past 20 years. "Criticism is bound to turn up somewhere," he explains. "Our focus is always on the task at hand: maximizing value and returning that to economic stakeholders."
Cooper isn't the only turnaround specialist facing scrutiny. The Justice Department, in a settlement in late 2001, forced another firm to return $3 million in fees to bankrupt companies. Among the reasons: the firm's close ties to creditor banks. Separately, the Justice Department recently cited conflicts of interest among restructuring specialists as a growing problem.
Cooper and others in the restructuring business say their first duty, once a company has filed for reorganization under the U.S. Bankruptcy Code, is to the creditors. Those with secured debt, such as big banks, are at the front of the line. Still, the code warns restructuring agents and others from engaging in financial relationships that might create a conflict.
That's easier said than done, given the often close ties between creditor banks and restructuring specialists. In some cases, critics complain, banks request a board of directors to hire a specific restructuring adviser before providing a new round of financing to a struggling company. Shareholders are then left to question whether the new boss is looking out for the company in trouble or the banks. "A turnaround management firm won't succeed as a viable business if it's not pleasing the principal creditors," says Harvard's Warren. "The conflict is obvious."
A warning. The courts sometimes take notice of potential conflicts. In the bankruptcy of Massachusetts textile manufacturer Malden Mills, the judge repeatedly expressed concerns that General Electric Capital Corp. might have requested that Cooper's firm handle the restructuring. The judge noted that GECC is both a partner of a Cooper-run venture capital fund, Catalyst Equity Partners, and a secured lender to Malden Mills. "It's troubling that [GECC] insisted on Zolfo," said Judge Joel B. Rosenthal, according to a transcript of a hearing. "They put the court in a very difficult position by taking somebody . . . that they're an investor with and putting them [Cooper's firm] in that position." The judge allowed Cooper's firm to stay on the case but said it would face serious consequences if it acted improperly. A GECC lawyer insisted that it did not demand that Cooper's firm be hired.
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