Bankruptcy experts cash in as more companies falter
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When Theresa Ventimiglia was laid off last year by a firm that transcribes legal statements, she started her own business. (Related item: Chart: Biggest bankruptcies since 1980) The goal of her New-York-based Global Deposition Services was modest: one or two depositions a day. But with a flurry of work, including a lot from bankruptcy courts, Ventimiglia, 38, handles about five a day and may hire help. “So far, it’s been terrific,” she says. That’s true for her and many other companies as corporate bankruptcies hit record numbers. Bankruptcy-focused lawyers, accountants, management consultants and liquidators are raking in millions restructuring busted companies. The money trail extends to paralegals, stenographers — even document messengers. Although shareholders who invested in companies that file for bankruptcy aren’t likely to see a dime, those who mop up often do well. The fees for bankruptcy-related legal and accounting help often exceed industry averages for other kinds of work. Turnaround experts brought in to run companies in bankruptcy reorganization are sometimes paid on par with CEOs from the USA’s biggest corporations. In some cases, bankruptcy work is duplicated — thus doubly expensive. All of the costs come out of the same assets that ultimately belong to creditors and other stakeholders, many of whom are infuriated. “Small shareholders are getting screwed,” says Marty Mikenas, 51, a salesman from Wauconda, Ill. He owns 100 shares of WorldCom, which in July made the biggest bankruptcy filing ever, rendering his stake essentially worthless. “I understand why lawyers and accountants are making big money, but I don’t agree with it.” Yolanda Alanis, 48, an airline sales representative from Houston who owns 800 Enron shares and 500 of WorldCom’s MCI, agrees: “It’s pathetic. But what other choice do we have? If the attorneys can get us 10 cents on the dollar, it’s better than nothing. I guess the attorneys have found a gold mine.” Five of the 10 biggest bankruptcy filings in the past 22 years have occurred this year: WorldCom, Global Crossing, Adelphia Communications, Kmart and NTL. Enron, No. 2 after WorldCom, set the stage for an ugly 2002 — filing for bankruptcy protection in December. Through June, 49 large publicly traded companies filed for bankruptcy protection, on pace to top the record 95 last year, says UCLA law professor Lynn LoPucki. All told, assets of publicly traded companies filing for bankruptcy have reached a record $267.6 billion so far this year, up 4% from 2001, says BankruptcyData.com. “It’s a golden age of sorts,” says Jack Partain, bankruptcy partner at Fulbright & Jaworski. “Bankruptcy specialists have more business than they can handle.” And those bankruptcies are getting more lucrative. As bankruptcies are bigger and more complex, reorganizations are taking longer and sometimes require specialized expertise that fetches huge fees. The restructuring of Enron — with an intricate web of businesses, questionable deals and murky offshore partnerships that make it hard to decipher — could generate up to $400 million in fees for bankers, lawyers, consultants and others. That would equal about 25% of the cash and investments Enron had in July. Another reason bankruptcy is so pricey: duplication. Financial teams for multiple parties may audit the same books, for example, to ensure that it’s done to their satisfaction. That results in “gigantic bills,” says G. Ray Warner, a scholar in residence at the American Bankruptcy Institute. Case in point: Investment firms Goldman Sachs and Lazard Freres may have charged WorldCom millions for the same consulting work, a concerned U.S. District Judge Jed Rakoff said last month. He said it appears WorldCom may be on the hook to pay both firms more than $10 million for similar merger and acquisition work. Profiting from failure When stocks soared in the late 1990s, bankruptcy-related services seemed like a dead-end business. However, those in the bankruptcy field were primed for the inevitable post-boom fallout, as was the case in the early 1990s, following the junk bond crisis and ensuing recession. In 1991, 38 large public companies filed for bankruptcy-court protection. “It’s the cyclical nature of the bankruptcy business,” says turnaround expert Bill Brandt, who predicts a record year in fees. “Contraction typically follows economic expansion. The cleanup will last through 2003.” Gorging on financial flameouts: |