Meet Mr. Fixit
Big fees and campaign gifts dog a bankruptcy guru
On most days, the midtown Manhattan office of Stephen Cooper is deserted, except for a pet lizard he keeps in a glass cage in the corner. The chairman of a financial advisory firm, Cooper is nearly always on the road, jetting from one executive suite to another to help bankrupt companies get back in the black.
One day he touches down in Burlington, Ontario, headquarters of Laidlaw Inc., a transportation giant. Then, he's off to Houston, where he serves as the interim chief executive of Enron, the energy firm that collapsed spectacularly in 2001, wiping out the retirement funds of thousands of employees and investors. All the traveling pays off handsomely. Cooper and the firm he runs, Kroll Zolfo Cooper, will rake in about $20 million a year for as long as it takes to dig Enron out of the gutter. The Laidlaw salvage job will yield $17.5 million.
Pros. Cooper is a star performer in the booming bankruptcy business, one of a small group of big-time turnaround specialists skilled at raising corporate carcasses from the dead. More than 400 public companies filed for bankruptcy during the past two years. These cases are growing ever more complex, and that's where the turnaround pros come in. Their bottom line is the bottom line: Get the balance sheet healthy enough to satisfy big creditor banks so the company can emerge from bankruptcy. Typically, they can fire senior management, restructure debt, sell off assets, lay off workers, and cut back benefits. "They take the ship that's headed to the rocks and steer it safely to calm waters," says Elizabeth Warren, a Harvard Law School professor. "And they do it with macho swagger."
Cooper can strut with the best of them. But critics have raised troubling questions about the operating methods of his company, until recently known as Zolfo Cooper. Shareholder groups, institutional investors, the Securities and Exchange Commission, and a bankruptcy judge have complained about excessive fees, fat employment contracts, and side business deals, court records show. The critics suggest fundamental conflicts of interest: A company managed by Cooper simultaneously maintains investments for some major banks that are the chief creditors of the bankrupt companies he is working to revive. In the end, critics say, even after some of Cooper's clients come out of bankruptcy, most employees and shareholders emerge empty-handed.
Cooper and two partners sold Zolfo Cooper last September to Kroll Inc., a security firm, in a deal that paid Cooper $50 million in cash with an expectation of another $50 million down the road. Cooper, 56, now runs a Kroll subsidiary, Kroll Zolfo Cooper. In a review of his operations, U.S. News found:
At Laidlaw, Cooper and most other board members voted in late 2001 to keep secret a report detailing $75,000 in questionable campaign contributions at a Laidlaw subsidiary. The report indicated that an executive of the subsidiary used corporate funds to reimburse some employees for federal campaign gifts. Federal law bars corporations from making such reimbursements. Over the strenuous objections of a prominent director, the board decided against disclosing the internal findings to the Federal Election Commission.
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.
Cooper's Catalyst Equity Partners, affiliated with Kroll Zolfo Cooper, invests in small, distressed companies. Other investors in his fund include J. P. Morgan Chase, Citibank, FleetBoston, and GECC. These institutions also have been secured creditors in bankruptcy cases in which Cooper has served as restructuring agent.
In an interview, Cooper says this web of relationships doesn't pose a conflict, since Catalyst Equity Partners is a separate entity. Moreover, he says, he always discloses potential conflicts to the courts, as required by law. "Since we have disclosed all of this, it puts even more pressure on us to behave appropriately at all times," Cooper says. "When you walk around with no clothes on, so to speak, people can determine whether or not you're being aboveboard in all of your undertakings."
Not everything, however, takes place in the open. It was behind closed doors that Cooper and others on the board of directors of Laidlaw, a diversified concern, decided against revealing to federal officials potentially serious violations of campaign laws. Cooper was named chief restructuring officer of Laidlaw, which filed for bankruptcy in Buffalo two years ago. Martha Hesse, a board member and former head of the Federal Energy Regulatory Commission under President Reagan, discovered that a Laidlaw subsidiary apparently had been illegally reimbursing some employees who had made federal campaign contributions.
Laidlaw's law firm, Jones, Day, Reavis & Pogue, launched an investigation into the campaign activities at the subsidiary, American Medical Response Inc. During the period 1995 through 2001, its review showed, some employees who contributed to federal campaigns received "bonus" payments from a "supplemental compensation plan." The firm examined $75,000 in contributions and said that employees denied that their donations were linked in any way to the compensation plan. But "there is a risk," the law firm's report said, "that a prosecutor would conclude that [plan] funds are partially used for illegal purposes." In the past, the lawyers said, prosecutors had dealt harshly with companies that made illegal campaign gifts.
Nonetheless, the law firm advised Laidlaw's board not to inform the Federal Election Commission of the findings. "The potential harm to the corporation resulting from voluntary disclosure," the law firm wrote, "significantly outweighs the perceived benefits associated with governmental disclosure." Hesse disagreed, but Cooper and the other directors endorsed the law firm's approach, according to minutes of a Dec. 17, 2001, meeting. Ivan Cairns, general counsel at Laidlaw, describes the board's action as "appropriate," and adds, "Mr. Cooper was very supportive of that action." Hesse, Cooper, and a Jones, Day attorney declined to comment.
Polaroid's bankruptcy also is troubling. The judge in the case recently appointed an independent examiner to investigate the company's bankruptcy and sale; critics want to know who bought Polaroid and to understand how the company was valued. "This was a highly peculiar bankruptcy proceeding," says Mark Agrast, an aide to Rep. William Delahunt, a Massachusetts Democrat. "There was a failure to ask obvious questions. It's going to decimate a lot of people."
When Polaroid took the advice of Cooper's firm and filed for reorganization in 2001, it reported $1.8 billion in assets. Last summer at an auction, the Waltham, Mass., company was sold to a fund called One Equity Partners for $255 million. Critics of the sale say the buyer got $231 million in cash, meaning the effective price for Polaroid was a mere $24 million--a steal by any measure. Bankruptcy records show Cooper's firm was intimately involved in the deal. It assisted both Polaroid management and One Equity Partners in valuing the assets and in negotiations. One Equity Partners, the venture capital arm of Chicago-based Bank One, never disclosed its investors in bankruptcy proceedings. Cooper says he has no business dealings with any of the investors but declined to disclose their identities.
Cooper's firm has earned more than $3 million in fees and expenses for its Polaroid work, and it is still billing. Cooper says the Polaroid outcome was a success. "We helped save a company that currently employs 3,500 worldwide when the prospect of liquidation was very real," he says. "Secured lenders recovered nearly all of their principal." Not everyone is happy, though: Three days before the bankruptcy filing in October 2001, the company eliminated life and health insurance benefits for more than 12,000 retirees. They had hoped to recover their benefits in bankruptcy court; the sale dashed those hopes. "Cooper may consider this a success," says Steve Morgan, a Polaroid shareholder. "Obviously, we see it differently." He opposes Cooper's continued employment.
Controversy. The Enron bankruptcy, the most complex in history, has been even more difficult. Cooper's appointment as interim CEO has been controversial from the start. Both the SEC and a group of institutional investors objected to his initial employment contract that would have paid him a multimillion-dollar bonus and allowed him to bring on more staff without court approval.
Bankruptcy records show that objections about his ties to secured creditors also were raised. Eight investors in Cooper's Catalyst Equity Partners fund, including J. P. Morgan Chase and Citibank, are also secured creditors in the Enron case. Those creditors "were tremendously exposed in the Enron case," says Andrew Entwistle, attorney for an institutional shareholder in the Enron case. "They wanted to bring in someone who was going to be friendly to them."
After the objections were raised, bankruptcy judge Arthur J. Gonzalez required Cooper to recuse himself from any Enron-related litigation involving the eight Catalyst investors. He allowed him to remain as CEO. Meanwhile, Cooper also revised his contract to satisfy critics, eliminating his success fee and agreeing to work full time for his $1.3 million salary, among other things. Cooper plans to give the court a plan to reorganize Enron by summer.
As a turnaround boss, Cooper is following a well-trod path to riches. At the conclusion of the Drexel Burnham Lambert bankruptcy case, Judge Francis Conrad said: "Whenever we have dealt with investment bankers and financial advisers, we have been left with the strong impression that for them the debtor is the cash cow to be milked." In the 16 months since Enron's collapse, more than $360 million has been paid to lawyers, accountants, investment bankers, and others. Cooper recently added 15 employees from his firm to the Enron account, at a cost of $864,000 each per year.
Conflict of interest?
Turnaround artists work side by side with--and across the table from--major banks. Stephen Cooper runs a venture capital firm, Catalyst Equity Partners, that counts Enron's creditors among its investors. Cooper also serves as Enron's interim chief executive officer.
Kroll Zolfo Cooper
Stephen Cooper, chairman
Catalyst Equity Partners
A venture fund run by Cooper, and an affiliate of Kroll Zolfo Cooper
Enron pays Kroll Zolfo Cooper about $20 million a year.
Enron
Stephen Cooper, interim chief executive
Banks invest in venture fund managed by Cooper.
Cooper helps decide which creditors Enron pays back--and how much they receive.
INVESTORS
Investors in Catalyst Equity Partners include:
Citibank
First Union
FleetBoston
General Electric Capital Corp.
ING Baring
JP Morgan Chase
CREDITORS
Enron's major creditors include:
Citibank
First Union
FleetBoston
General Electric Capital Corp.
ING Baring
JP Morgan Chase
Source: U.S. Bankruptcy Court records
Bankruptcy pays
Rebound
Turnaround artist Stephen Cooper commands top dollar for trying to bring failed companies back to life.
CLIENTS ESTIMATED FEES
Enron $20.0 mil.
Laidlaw $17.5 mil.
Washington Group International $5.7 mil.
Polaroid $3.4 mil.
Note: Enron fee is per year. Fees are for work done by Cooper and associates at his firms.
Source: U.S. Bankruptcy Court records
This story appears in the May 5, 2003 print edition of U.S. News & World Report.