Marble Ridge Capital LP Demands Neiman Marcus Group Board Return the MyTheresa Assets to Company, End Conflicts Related to Improper Sponsor Transaction

NEW YORK, Dec. 3, 2018 /PRNewswire/ -- Marble Ridge Capital LP, a value-oriented distressed debt investment firm, today reported it has sent the following letter to the Board of Directors of the The Neiman Marcus Group, Inc. ("Parent") demanding the return of the MyTheresa assets to its insolvent subsidiary, as well as the elimination of the pervasive conflicts of interests that enabled these valuable assets to be improperly stripped from the Company.

Marble Ridge provided the Letter in response to a Form 8-K filing as of November 30, 2018 by Neiman Marcus Group LTD LLC ("Company") that showed that the Parent, which is jointly owned by Ares Management ("Ares") and Canada Pension Plan Investment Board ("CPPIB"), has no current intention of returning the MyTheresa assets to the Company. Ares and CPPIB, aided by conflicted legal counsel, recently transferred the MyTheresa business without any consideration to Parent. Parent is not an issuer, borrower, or guarantor under the debt documents. As stated in the letter:

The following is the letter Marble Ridge has sent to the Neiman Marcus Group Board of Directors:

December 3, 2018

BY ELECTRONIC MAIL AND
OVERNIGHT COURIER

Board of Directors, c/o David Kaplan, Chairman
Attn: Tracy Preston, General Counsel
The Neiman Marcus Group, Inc.
One Marcus Square
1618 Main Street
Dallas, Texas 75201
[email protected]            

RE:      Demand to Return MyTheresa and Resolve Your Conflicts of Interest

Dear Members of the Board of Directors,

We have been clear throughout our communications with you that the valuable MyTheresa assets must be returned to Neiman Marcus Group Ltd LLC (the "Company") and the pervasive conflicts of interest that enabled these valuable assets to be improperly stripped for no consideration must be resolved. No effort by you to engage with creditors can properly move forward unless and until these prerequisites are addressed. Your continued misconduct puts at risk thousands of jobs and the viability of a storied franchise that includes marquee brands such as Neiman Marcus and Bergdorf Goodman.

Unfortunately, your actions demonstrate that you continue to enable the Company's out-of-money equity sponsors, Ares Management L.P. ("Ares") and Canada Pension Plan Investment Board ("CPPIB"), to strip the valuable MyTheresa assets from the Company without consequence.  You have allowed, or have turned a blind eye to the sponsors' not-so-subtle sleight of hand machinations to lure creditors into a false negotiation meant only to perpetuate their self-serving enrichment scheme. You have failed to take any action whatsoever to resolve the significant conflicts of interest that exist between The Neiman Marcus Group, Inc. (the "Parent") and its insolvent subsidiary, including your legal advisors, which continue to enable this illicit scheme.

As you know, or should have known, the sponsors have enabled this scheme through a "pass-through" corporate governance structure engineered to avoid liability for breach of fiduciary duties while maintaining valuable tax attributes for their own benefit. As Directors, you are aware that once the Company became insolvent, its residual beneficiaries changed from its equity holders to its creditors. After that time, any action taken at the expense of the Company in furtherance of the interests of Parent is improper and thus unacceptable. Appropriate corporate governance requires the creation of an independent Board of Directors at the Company with separate and independent legal counsel with full authority to bring claims against Parent to manage this clear conflict of interest.

However, by design, and as a result of the improper corporate structure implemented by Ares and CPPIB along with conflicted legal counsel, Kirkland & Ellis LLP and Proskauer Rose LP, no such independent body exists at the Company. The improper corporate structure the Board has allowed and continues to perpetuate perverts the basic principles of corporate responsibility by eliminating any independence between Parent and its insolvent subsidiary. That makes the Board, as fiduciaries of Parent, inherently and deeply conflicted. 

Furthermore, you and your conflicted legal counsel had to have known, or should have known that since March 2017 – the time of the initial step in the MyTheresa transactions – the Company was and continues to be insolvent.

As early as 2016, analysts had noted a change in the Company's outlook after same store sales dropped precipitously in the fourth quarter of 2015. Debtwire, a widely-read industry research publication, issued a report in the Fall of 2016 indicating the Company's insolvency. Since then, it has continued to issue additional reports, all underscoring that the Company is insolvent.

After the Parent stripped the MyTheresa assets from the Company on September 18, 2018, Debtwire reduced its recovery estimate of the Company even further from 43.7% to 31.6% and Goldman Sachs published a recovery estimate between 7% and 26%, indicating that the Company was and continues to be insolvent.

Given these uncontroverted facts, what is unacceptable is that you, the Members of the Board of Directors, have failed to acknowledge, let alone address the fact that you and your legal advisors are hopelessly conflicted, have allowed the misappropriation of assets from your insolvent subsidiary, and have otherwise engaged in deceptive and misleading conduct.

This Board-level conflict was magnified by the role of Kirkland & Ellis LLP and Proskauer Rose LP, which stood on opposite sides of the same transaction through their representation of both the Parent and the Company at the same time.

There is clear precedent that the current corporate structure and role of Kirkland & Ellis LLP and Proskauer Rose LP are untenable.

In March 2016, a full year prior to the first-step transaction that occurred in March 2017, the court-appointed Examiner in the Caesars bankruptcy case analyzed the actions and relationship of the Board of Directors of the Caesar's parent company ("CEC") to its insolvent subsidiary ("CEOC") and their counsel under very similar circumstances. Kirkland & Ellis LLP is more than familiar with that Report and its conclusions because it represented the insolvent subsidiary during the bankruptcy case. In relevant part:

Once CEOC became insolvent there thus was the potential for conflict between CEC, the equity owner of CEOC, and CEOC itself. CEC, and its officers and directors, owed their duties to CEC's equity holders, but that was not the case for CEOC's officers and directors. Actions that might have been beneficial to CEC might have been less clearly, or potentially not, in the interest of CEOC and its creditors. Those who were officers and directors of both entities were in an inherently conflicted position. CEC, the Sponsors and their advisors, however, at least until late June 2014, never acted as if this were the case. Decisions on behalf of CEOC were effectively made by CEC and the Sponsors, and in none of the investigated transactions prior to August 2014 did CEOC have independent directors or advisors looking out for its interests . . . Instead, CEOC should have had its own independent directors and advisors in connection with each of the challenged transactions.     

The Caesars Examiner analyzed the conduct of counsel that represented both the parent and insolvent subsidiary at the same time for conflict of interest, malpractice and aiding and abetting breach of fiduciary duty. In relevant part:

The situation is different, however, when the parent and insolvent subsidiary are on opposite sides of the same transaction and the same law firm purports to represent both entities. In that case the interests of the two entities diverge. And, once such a divergence of interest occurs, a lawyer can only undertake or continue representing multiple clients if it is clear that the lawyer can competently represent both clients and if both clients provide informed consent based on a full disclosure by the lawyer of the issues involved in the simultaneous representation. Here it does not seem that either requirement was satisfied. The issues then are when was [the law firm] adequately on notice of CEOC's potential insolvency (emphasis added), and in what transactions did such a divergence of interest occur.

Based on this clear precedent, the Parent must undo its fraudulent corporate scheme by forming an independent Board of Directors at the Company with separate and independent legal counsel.

We, as a statutory creditor of the Company, reserve the right to correct this corrosive conduct if it is not addressed by Parent by seeking, among other remedies, the appointment of a Receiver with authority to bring derivative actions on behalf of the Company against Parent and any party that has aided and abetted their misconduct.

We are fully prepared to take all necessary actions to protect our rights, all of which are expressly preserved. 

*          *          *

Respectfully,

MARBLE RIDGE CAPITAL

Daniel Kamensky

cc:        Kirkland & Ellis LLP
            333 South Hope Street
            Los Angeles, CA 90071
            Attn:     David M. Nemecek, Esq.

            Proskauer Rose LP
            2029 Century Park East, Suite 2400
            Los Angeles, CA 90067
            Attn:     Pippa Bond, Esq.
           

            Brown Rudnick LLP
            Seven Times Square
            New York, New York 10036
            Attn:    Sigmund S. Wissner-Gross, Esq.
                       Steven B. Levine, Esq.
                       Brian T. Rice, Esq.

About Marble Ridge Capital LP

The principal objective of Marble Ridge is to achieve superior risk-adjusted returns throughout market cycles by making opportunistic investments across and throughout the capital structure of companies that are expected to undergo some sort of corporate event or restructuring.  Marble Ridge is led by Managing Partner Dan Kamensky, who has over 19 years of industry experience. Prior to founding Marble Ridge, Mr. Kamensky was a Partner at Paulson & Co. Inc., where he initiated and executed some of the firm's most complex and profitable distressed and event-driven investments across the capital structure.

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SOURCE Marble Ridge Capital LP