Hello all. While I've been crisscrossing the eastern seaboard from ABI conference to ABI conference, I hope you've been withstanding the heat and staying safe and productive.
It's been a crazy month since I last wrote. The weather's been unpredictable, of course, with record rainfalls and violent storms. Extraordinary events took place among the leadership of ride-sharing giant Uber; intellectual property values continue to challenge even the most well-intentioned debtors; and thieves be thieving, same as they always do.
We'll talk about these things (not the weather - nobody cares what we have to say about the weather, and rightfully so) in this edition of The Next Chapter, courtesy of Joe, Jeremy, Anne, and the whole G/S team.
If you're at the ABI Mid-Atlantic Bankruptcy Workshop in Hershey this week, stop by and say hi to us! If you have ideas you'd like to see us cover in a future newsletter, share those with us, too.
On to August!
by Joe Solmonese
Uber. Ten years ago, it was a German prefix meaning "extra." Two years ago, a cheap way to get across town. But today when we think of Uber, most of us think of a company defined by explosively rapid growth and alarmingly bad corporate and executive behavior.
Uber is extraordinary, and not always in a good way.
But what about the bottom line? Uber is valued at $69 billion. It reported $20 billion in gross revenue in 2016, and $2.8 billion in losses.
Business is good, it seems, even when you are knee-deep in bad press.
So why bother being a good corporate citizen, when you can be bad and still prosper? Because you're playing the long game.
Uber is making money now, but it's a very young, very troubled company that could wind up a flash in the pan. In 2015, Uber booked nine times as many rides as Lyft; today it books about 5 times as many.
That's a big cut in less than two years. Just because it seems like Uber is everywhere doesn't mean it always will be. And plenty of established companies manage to both do good and do well. Starbucks, Ben & Jerry's, Kenneth Cole - all are successful companies known for being good corporate citizens.
Consumers care about value, yes, but they also like companies that seek to have a positive impact on society. According to Nielson, in 2015, "sales of consumer goods from brands with a demonstrated commitment to sustainability have grown more than 4% globally, while those without grew less than 1%."
There are other benefits, as well, most notably the ability to attract talent. Companies that are perceived as environmentally wasteful or hostile to women or LGBTQ people have a hard time hiring the best and the brightest. It turns out smart people like being associated with fairness, sustainability, and equality! Companies that are demonstrably committed to social responsibility find it easier to recruit and retain employees, increasing productivity and saving millions in turnover and training costs.
Uber has taken bold steps to turn the ship around
. Kalanick is no longer CEO, and the board is beginning to exert strict oversight. The corporate culture is changing. Diversity and inclusion are in, "bro" behavior and harassment are out. After years of stonewalling, Uber is finally allowing drivers to earn tips.
This is all for the good, for consumers and for Uber. With a little effort, in ten years when people think of Uber, they'll think of a profitable established company that, after suffering some early setbacks, turned itself into a model corporate citizen.
 Forbes June 11, 2017
Joe Solmonese leads the Gavin/Solmonese Corporate Engagement practice, helping organizations break down problems and find actionable solutions. Prior to forming Gavin/Solmonese, he was president of the Human Rights Campaign and CEO of EMILY's List.
|§363 Sales: Evaluating Brand Health
by Jeremy VanEtten
In a creditors' committee case earlier this year, we participated in a bankruptcy auction in which the debtors, Hampshire Brands, Inc. et al.¸ a fashion designer and producer, sold their
brand to a competitive buyer. In this case, the extreme seasonality of the retail clothing business, combined with the need for James Campbell's largest customer to see stability and expediency in its supply chain, resulted in a fast sale process being both warranted and necessary. After a breakneck marketing process and several robust rounds of bidding, all parties (except, perhaps, for the bidders who did not win the auction) were satisfied with the outcome and the sale was completed in just a few weeks.
This chain of events got me thinking about brand health, especially as it relates to distressed sale situations. When I was helping re-launch the
arena football team, I was reminded of the chilling effect the word "bankruptcy" can have on brands. We often hear people ask, "aren't they bankrupt?" as if bankruptcy means the death of a brand. We know that's not always the case.
Although various issues can negatively impact brand health, in the instance of James Campbell, the compelling characteristics that made the brand attractive were the positioning of the brand and product delivery.
Positioning is the space a brand occupies in a consumer's mind. Every day, we make hundreds of decisions about products and services. There are certain things we know - or think we know - about various brands based on our personal experiences, information gleaned from others, and what we see or hear in the media.
When dealing with a distressed company, both buyer and seller must evaluate how a bankruptcy filing might impact the value of its brands. In many cases, consumers are unaware of the company's financial status and the associated brand positioning remains the same. In other cases, consumers know about the filing and their perception of the brand, correctly or not, is indeed, changed. In that case, the parties must take a hard look at how this influences the brand's potential to be successful going forward.
I used to tell my marketing students that among the four "Ps" of marketing (product, promotion, price, and place), place is often the forgotten "P." In the James Campbell sale, distribution was at the crux of the brand's viability. When retailers don't receive shipments from a vendor on time, they are forced to replace shelf space with a competing vendor's products - space the seller is not guaranteed to get back from the retailer. Cancelled orders, excess inventory, and poor and even negative margins caused by liquidation compound the problem. Consumers get a chance to sample replacement products and might quickly lose interest in the brand.
In our business, we must understand how interruptions affect a brand's future. Have there been delivery gaps? Have retailers moved on? Do we have a home for current and future orders?
Among the many factors to consider in a §363 sale involving brand intellectual
property, we must always evaluate whether the brand's position has changed as a
result of the filing, or during the bankruptcy or restructuring process. We need to
determine if that change can be good, bad, or indifferent - and whether the change
brings irreparable harm we can prevent, minimize, or eliminate. Our reputation and
our clients' success depend on it.
Jeremy VanEtten is a member of the Gavin/Solmonese Corporate Recovery team providing consulting services to trustees, debtors, senior lenders, indentured trustees, and unsecured creditors in Chapter 7 and 11 bankruptcies, as well as out-of-court matters. He has a broad range of experience, serving industries such as technology, automotive, entertainment, gaming, construction, large retail, and wholesale.
|Financial Statement Fraud: Three Mini Case Studies
by Anne Eberhardt, CFE, CAMS, Senior Director at Gavin/Solmonese
Most people have trouble picturing financial statement fraud. Not many people go to jail for committing it, and often the perpetrators don't even profit from it. In fact, many of the individuals involved in financial statement fraud consider their actions to be beneficial to the company.
Financial statement fraud is a "scheme in which an employee intentionally causes a misstatement or omission of material information in the organization's financial reports."
While the number of cases of financial statement fraud is much lower than with other types of fraud (such as embezzlement or corruption), the losses are much higher.
In this article, I present three examples of financial statement fraud to illustrate several ways fraud is committed.
Overvalued Complex Financial Instruments
HF, a hedge fund, provided liquidity to companies in the form of convertible debentures, earning its
fees based on the dollar value of assets under management (AUM): the higher the AUM, the higher the fees, thus creating an incentive for HF to report its assets at the highest possible values.
As a subprime lender, all of HF's investments began to shrink during the global financial crisis that began in the second half of 2007. Nevertheless, during its year-end reporting, HF continued reporting its positions at a gain.
Overstated Intangible Assets
In April of 2016, the SEC issued a Cease-and-Desist Proceeding against
after the discovery of recurring improper accounting practices. Among the issues was the failure to amortize intangible assets properly, when senior accounting officials ignored significant errors in the calculation of the amortization of its investment in an entity the company had acquired several years before.
Gerry and Tom formed a partnership in which Gerry provided a small amount of equity along with access to substantial lines of credit. Tom arranged for all the credit line information to be sent to his Florida office, enabling him to draw on the credit lines without informing Gerry, who lived in California.
Once he had drawn all of Gerry's credit lines, Tom sought additional credit. He prepared personal financial statements, listing his interest in the assets - but not the liabilities - of his partnership with Gerry. Tom succeeded in obtaining a significant loan based on the perceived strength of his deceptive financial statements.
In early 2009, Tom defaulted on the loan, which was material to the bank's lending portfolio, forcing the bank itself to close. Federal regulators pursued a bank fraud case against Tom for misrepresenting his financial position.
Human ingenuity knows no bounds, and ingenuity at committing fraud is no exception. Frauds are doubtless occurring today that will shock us when they are finally revealed. Nevertheless, as consumers of public financial information, it is helpful to understand how fraud has been perpetrated in the past, and what ruses have been applied, to provide an understanding of the vulnerabilities inherent in the financial reporting process.
 ACFE Report to the Nations on Occupational Fraud and Abuse: 2016 Global Fraud Study, Glossary of Terminology, pg. 90.
This article is an abridged version of an article that appeared in the July/August 2017 issue of the ABF Journal.
Based in New York City, Anne Eberhardt is responsible for furthering the firm's forensic investigation practice. As an expert witness and forensic accountant, Anne is experienced in conducting forensic analyses, building and testing financial models, resolving economic disputes, and leading teams in large-scale investigations.
|22nd Annual ABI Southeast Bankruptcy Workshop - ABI Talks: Ethics and Bankruptcy Ideas Worth Spreading
|22nd Annual ABI Southeast Bankruptcy Workshop - Hilton Head, SC
Dinner at Old Oyster Factory
Kelly & Jeremy Williams,
Petra & Ross Waetzman,
919 Market Street, Suite 600, Wilmington, DE 19801