Gordon Silver “shamelessly” handled TelexFree bankruptcy
That the filing of bankruptcy proceedings to escape criminal liability for the running of a billion dollar Ponzi scheme was absurd, is and always will be a given.
Absurder still are the fee claims submitted by firms hired by TelexFree to orchestrate the bankruptcy circus.
Despite being approached and hired only after TelexFree learned a regulatory shutdown was imminent, these firms are now collectively demanding they be paid millions of dollars in fees for their services.
One such firm is Gordon Silver, who the SEC claim do not deserve any of the $230,000 in fees they believe they are owed.
At the core of the SEC’s objection is that the services provided to Gordon Silver were ‘were not necessary to the administration of the estate (TelexFree)‘, which ‘is required for a court to approve an application under Bankruptcy Code Section 330(a)‘.
I don’t know what Silver’s response to this charge might be, but it’s a hard case to make that your bankruptcy filing was in any way required as part of the administration of TelexFree, a billion dollar Ponzi scheme.
Gordon Silver was hired on April 13 and filed TelexFree’s Chapter 11 petition late that evening.1
On April 15 – less than 48 hours later – the FBI seized all of TelexFree’s computers and books and records as well as $38 million in cashier’s checks, and the Commission filed an enforcement action in the District of Massachusetts charging that TelexFree was an enormous pyramid scheme.
The next day, the court in the Commission’s case entered a preliminary order freezing all of TelexFree’s assets and prohibiting it from raising more money from actual or prospective investors.
At that point, TelexFree was effectively out of business, and it was obvious that no reorganization was feasible.
Stephen Darr, the Chapter 11 Trustee put in charge of TelexFree, recently confirmed as much. Putting an end to the ongoing speculation by TelexFree affiliates that the Ponzi scheme might come back, Darr stated in July that he had ‘no intention of reorganizing or reactivating‘ TelexFree.
One would think that trying to push ahead with bankruptcy proceedings to subvert joint action from the SEC, Massachusetts Securities Division and Department of Justice was wholly futile, but Gordon Silver instead chose to milk the situation for all it was worth:
Nevertheless, Gordon Silver continued to churn the case – racking up nearly $192,000 in fees after April 15.
The firm now wants TelexFree’s unsecured creditors – virtually all of whom are innocent victims of the pyramid scheme – to foot the bill for its extravagance.
Just how outrageous was Gordon Silver’s extravagance?
First, the firm filed and argued a frivolous motion charging that the asset freeze entered in the Commission’s enforcement case violated the automatic stay in Bankruptcy Code Section 362(a).
Second, the firm should never have been hired at all. It collaborated in the unjustified decision to file for bankruptcy in Las Vegas, even though the only link to Nevada was a mailing address for TelexFree, LLC, and it wasted substantial attorney time opposing the Commission’s inevitable – and successful – motion to transfer venue to Massachusetts.
Third, the firm shamelessly overstaffed the case, using four partners and five associates and billing excessive amounts for
That a professional law firm failed to check (or simply ignored) that their client was showboating in Nevada on nothing more than a mailing address, is called out for what it is: the epitome of unprofessionalism.
By that point Gordon Silver had to have known TelexFree were trying to escape billion dollar Ponzi regulatory problems, but they went ahead with the proceeding (and fought the SEC over it no less) anyway.
Under Section 330(a)(1), a court may award a professional employed under Section 327 “(A) reasonable compensation for actual, necessary services rendered … and (B) reimbursement for actual, necessary expenses.” 11 U.S.C. §330(a)(1).
Section 330(a)(3) identifies factors for a court to consider when determining what to award, including “(A) the time spent …; (B) the rates charged …; [and] (C) whether the services were necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a case under
this title.” 11 U.S.C. §330(a)(3).
Under Section 330(a)(4)(A), a court “shall not allow compensation for – (i) unnecessary duplication of services; or (ii) services that were not –(I) reasonably likely to benefit the debtor’s estate; or (II) necessary to the administration of the case.”
In assessing the reasonableness of a fee application under Section 330(a), courts have considered, among other things, whether the services were necessary or beneficial, whether the services were adequately documented, whether the professional exercised proper billing judgment; and whether the fees were reasonable taking into account the statutory factors referenced above.
Bear in mind of course that Gordon Silver’s requested fees relate to services provided when TelexFree first filed their Chapter 11 bankruptcy application.
In other words, courts evaluating fee applications look at:
(1) whether the work represents actual compensation rather than overhead; (2) whether the work was necessary; and (3) whether the charge is reasonable.
Courts should eliminate time that was unreasonably, unnecessarily, or inefficiently devoted to the case.
The burden of proof for demonstrating the reasonableness of fees is ultimately on the applicant.
Here, Gordon Silver intones the standard language about how its services were necessary and beneficial to the estate.
As it has done throughout these proceedings, however, it ignores the grim reality that any reorganization of TelexFree was doomed at the start.
The firm also fails to address the unnecessary cost of filing a frivolous motion challenging the TRO as a violation of the automatic stay, the unnecessary cost of filing the case in Nevada, and the substantial amount of overstaffing and duplication of effort.
In relation to any services provided by Gordon Silver after the regulatory shutdown of TelexFree, the SEC really drive the point home:
As of April 15 – when the FBI seized its computers, its books and records, and $38 million of cashier’s checks – and certainly as of April 17 – when the District Court froze all its assets and prohibited it from recruiting new investors – TelexFree was out of business, and there was nothing to reorganize.
After all, how could TelexFree possibly hope to develop a viable reorganization plan when it had no access to its computers and its books and records, when all its assets were frozen, and when it was prohibited from soliciting new promoters?
At that time, the only prudent way to preserve TelexFree’s assets for the benefit of its unsecured creditors, virtually all of whom were innocent investors in AdCentral, was a liquidation.
The mention of a liquidation (Chapter 7) by the SEC is prudent, as we’ve long suspected that’s ultimately what Darr will end up converting the current Chapter 11 bankruptcy into.
As of yet though no timetable or draft plan indicating an actual conversion has been made public.
Back to Gordon Silver and their capitalizing on the shutdown of the business,
Instead, Gordon Silver proceeded with the purported reorganization and continued to treat TelexFree as a license to generate substantial fees.
The firm has billed nearly $192,000 for work performed after April 15, when the FBI seized TelexFree’s computers, books and records,
and $38 million of cashier’s checks on April 15.
It has billed more than $177,000 for work performed after April 17, when the TRO freezing TelexFree’s assets and prohibiting the solicitation of new AdCentral promoters became public.
I mean really, at what point do you hold a law firm accountable for their actions? I’m not suggesting Gordon Silver in any way be held responsible for TelexFree’s Ponzi scheme, hell you might even argue they were in the dark prior to the regulatory action against TelexFree being made public on August 17th… but requesting payment for services rendered after April 17th?
Come on now. You guys did that on your own, why should TelexFree victims foot the bill?
Drawn into the accusations against Gordon Silver are fellow-firm Greenberg Traurig, who the SEC all but accuse of colluding with Gordon Silver to overcharge TelexFree:
When the petitions were filed on April 13, TelexFree’s offices were in Massachusetts, the two founding officers and sole shareholders and the interim CEO were in Massachusetts, all employees on the payroll were in Massachusetts, the computers and books and records were in Massachusetts, Alvarez & Marsal was planning to do its work in Massachusetts, and the MSD was investigating TelexFree in Massachusetts.
By contrast, the only connection to Nevada was that one of the three entities (TelexFree, LLC) was incorporated there and had a mailbox there.
Gordon Silver’s collaboration in the strategic decision to file in Nevada – far from TelexFree’s actual operations and from the existing and foreseeable government enforcement activity – led to a duplication of effort with Greenberg Traurig.
For example, the two firms billed virtually identical amounts (approximately $45,000 each) for work on the frivolous automatic stay motion.
In addition, given TelexFree’s strong presence in Massachusetts and lack of contacts with Nevada, it was inevitable that someone – the Commission, as it turned out – filed a motion to transfer venue to Massachusetts.
Nor is it surprising that the transfer motion was successful. The amount billed for opposing the motion is difficult to determine, because Gordon Silver included it within a more general “Litigation” category.
A review of the firm’s billing detail suggests that three partners, two associates, and one paralegal worked nearly fifty hours on the opposition, for which it has billed approximately $20,000.
The SEC also highlight examples of Gordon Silver’s excessive billing (“billing overkill” and overstaffing, citing three instances where Gordon Silver’s staffing and billing was disproportionate to the work being carried out by the firm.
In summary the SEC conclude,
the Court should disallow all fees and expenses incurred after Gordon Silver knew or should have known that the reorganization was doomed.
All time and expenses incurred on the automatic stay motion were unnecessary because the motion was frivolous.
As part of its scorched-earth approach to this bankruptcy, Gordon Silver filed a motion that the TRO in the Commission’s enforcement case violated the automatic stay under Section 362(a).
In its brief, the law firm relied on case law interpreting the prior version of Section 362(b) – before adoption of the 1998 amendment that explicitly excepted governmental and regulatory actions from Section 362(a)(3).
At the May 2 hearing, its attorney argued at length that the TRO constituted the improper “enforcement of a money judgment” against TelexFree.
That argument was nonsense.
The TRO was obviously not a money judgment – it was a preliminary equitable order intended to halt the wrongdoing and preserve TelexFree’s assets for the benefit of injured investors.
The Court should disallow compensation for all of Gordon Silver’s work performed after the FBI raid on April 15 (or after the TRO became public on April 17).
Trustee Stephen Darr has additionally filed his own objection to Gordon Silver’s compensation request. He writes
After the Restraining Order was issued and the Asset Seizure conducted, the Debtors had no cash or access to cash, no operations, and no employees. Most of the time spent after April 15, 2014 related to futile litigation with governmental authorities.
Gordon (Silver) participated in the preparation and filing on April 23, 2014 of the motion (the “Stay Motion”) requesting that the Nevada Bankruptcy Court, among other things, modify or vacate the Restraining Order issued by the District Court.
The Stay Motion had no merit and services rendered in connection therewith were not reasonable, necessary, nor reasonably likely to benefit the Debtors’ estates at the time such services were rendered.
The fees and expenses sought by Gordon should be substantially disallowed because a substantial portion of the services rendered by Gordon was neither reasonable, necessary, nor reasonably likely to benefit the Debtors’ estates at the time such services were rendered.
A hearing for Gordon Silver application for fees is currently scheduled for September 23rd. It should be interesting to hear them try to explain why they are entitled to hundreds of thousands of dollars of TelexFree victim’s money.
Footnote: A full copy of the SEC’s “Objection To The Fee Application Of Gordon Silver” can be read over at Kurtzman Carson Consultants.