By Soma Biswas 

Hedge-fund founder Dan Kamensky was sentenced to six months in prison for bankruptcy fraud over his attempt to quash a rival bid for shares of a Neiman Marcus Group Ltd. business that he wanted to buy himself.

The sentence, handed down in a federal courtroom in New York, falls short of the 12- to 18-month prison term sought by prosecutors but exceeds the punishment sought by Mr. Kamensky's lawyers, who asked that he only be put on probation and be required to do community service.

The founder of hedge-fund firm Marble Ridge Capital LP, Mr. Kamensky admitted to prosecutors that last year he tried to sideline a competitor's bid for shares of Mytheresa, a thriving e-commerce business formerly owned by Neiman Marcus, which was at the time in bankruptcy.

His actions amounted to a criminal violation of bankruptcy law because, as a member of an official creditors committee in the Neiman Marcus chapter 11 case, he had an obligation to look out for all of the company's creditors, not just his firm's own financial interests.

The bankruptcy-fraud charge he pleaded guilty to in February carried a maximum five-year prison sentence. In addition to the six-month prison term, Mr. Kamensky was sentenced Friday to six months of supervised release under home detention.

During Friday's court hearing, Judge Denise Cote described Mr. Kamensky as a "good man, but one who lost his moorings" under pressure.

"He came undone," the judge said. "He tried to control what he could not control."

Mr. Kamensky's arrest came after he waged a legal battle for more than two years against Neiman Marcus and its private-equity backers over Mytheresa, a fast-growing online subsidiary. He took issue with a spinoff transaction that he said deprived Neiman's creditors of its crown jewel, while rewarding the retail chain's owners.

Neiman Marcus filed for bankruptcy last year after the coronavirus pandemic shut down nonessential shopping across the country. During the course of the bankruptcy, Mr. Kamensky helped extract a concession from Neiman's owners to return some of their shares of Mytheresa.

The Mytheresa shares were an important part of the recovery for unsecured creditors, and Mr. Kamensky offered to buy those shares from other creditors for cash upfront, hoping for a profit once Mytheresa went public down the line.

A potential competitor, however, showed up proposing a similar deal for the shares, at a higher price than he was offering. When Mr. Kamensky learned of the rival bidder, he pressured its investment bank, Jefferies LLC, to stand down, according to a government inquiry into his actions.

Mr. Kamensky's lawyers had argued he ought to be spared prison time, saying his actions weren't premeditated or planned and ultimately didn't harm other Neiman Marcus creditors.

In Friday's hearing, his lawyer Joon Kim said it was "unfortunate, in some ways tragic" that the settlement Mr. Kamensky helped achieve on behalf of unsecured creditors had led to his conviction.

Prosecutors said a prison term was needed to deter such misconduct, telling the judge in court papers that allowing Mr. Kamensky to avoid prison would send the wrong message about the seriousness of his conduct.

Mr. Kamensky, a former bankruptcy attorney with deep experience investing in troubled companies, "used his skills to corrupt the bankruptcy process," lawyers for the U.S. attorney's office in Manhattan said in their sentencing recommendation.

In handing down the sentence Friday, Judge Cote said she wasn't concerned that Mr. Kamensky would engage in similar misconduct again. The judge also said the fact that criminal prosecutions for bankruptcy fraud are rare wasn't a reason to go easy on Mr. Kamensky or lessen the need to deter others.

"The bankruptcy process depends on trust and honesty," the judge said.

Mr. Kamensky, 48 years old, is a well-known figure in the tightknit world of big corporate restructurings and distressed-debt investing. Before starting his own hedge fund in 2015, Mr. Kamensky worked at law firm Simpson Thacher & Bartlett LLP, investment bank Lehman Brothers Holdings Inc. and hedge-fund manager Paulson & Co.

Judge Cote said she was convinced Mr. Kamensky's actions weren't premeditated but were the result of a quick reaction in a stressful situation. When Mr. Kamensky learned he was facing a competing bid, he had spent $3.5 million in legal fees pursuing the battle over Mytheresa, according to court papers.

But Judge Cote also said that once his effort to coerce Jefferies was reported to other professionals in the Neiman Marcus case, Mr. Kamensky tried to cover his tracks by urging a bank employee over the phone to present the situation as a misunderstanding so that he wouldn't end up in prison.

"He doubled down," the judge said. "He tried to rewrite history. He tried to get another person to lie for him."

Neiman Marcus exited bankruptcy last year, and in January Mytheresa went public with a valuation of $2.2 billion. Government lawyer Richard Cooper said at the hearing that "there was no financial loss" due to Mr. Kamensky's actions, but "there was an intangible harm done to the process."

The judge, though, said it wasn't clear to her whether Mr. Kamensky's actions had caused any economic harm to unsecured creditors. His misconduct changed the course of the bankruptcy case, and it is impossible to know if the outcomes for creditors would have been different, she said.

Write to Soma Biswas at soma.biswas@wsj.com

(END) Dow Jones Newswires

May 07, 2021 17:20 ET (21:20 GMT)