• by Steve McClellan  @mp_mcclellan, April 15, 2014

It looks like a guy who knows where many of the proverbial bodies are buried in the KSL bankruptcy case is about to tell his side of the story.

The judge overseeing the case has granted subpoena power to David Gottlieb, Trustee for the now defunct KSL, to interrogate William Hughes, who Gottlieb said in court papers “appears to have been the sole outside accountant” to KSL, and company principals Kal Liebowitz and Hank Cohen for more than 20 years.

Hughes, with the accounting firm of Rosen, Seymour Shapss Martin & Co., handled the company’s financial books and tax filings and “communicated frequently” with Liebowitz, Cohen and a succession of controllers and CFOs, including former controller Geoffrey Charness, who KSL has claimed stole millions from the company from 2006 to 2010 and was at least partly responsible for the firm’s demise.

But according to Gottlieb, who has now been investigating KSL’s downfall since the beginning of the year, KSL’s troubles started well before any alleged duplicity on the part of Charness.

Gottlieb stated in a court filing last week: “My investigation to date indicates that the Debtor KSL appears to have been operating on a cash negative basis from at least 2002 (i.e., prior to Charness’ tenure) and continued to operate on a cash negative basis consistently through” Sept. 11, 2013 when the company filed for bankruptcy."

Testimony from Hughes might shed light on how the company managed to operate on a cash negative basis for so long. Sources close to the defunct firm said that it basically operated “on the float” of prepaid media buys from clients such as Bacardi, its biggest client, which appointed a new media agency in May of last year, just four months before KSL went belly up.

In effect, sources said, KSL would use client money as operating capital and pay media bills after they were reconciled months later using other funds.

Gottlieb also stated in court papers filed last week: “It appears that the Debtor’s principals, most notably Kalman Liebowitz, siphoned millions of dollars out of the company in undocumented loans, which have not been repaid to this date.”   

“I am informed and believe that the proposed Examinee [Hughes] has within his possession and control substantial accounting and financial information relating to the Debtors relevant to claims I may be able to assert on behalf of the estates relating to the conduct of the debtors and the management thereof.” 

Among the topics Gottlieb intends to question Hughes about is an agreement under which KSL paid former client and Sweet’N Low marketer Cumberland Packing Corp. an estimated $10 million to settle allegations by Cumberland that it was overcharged for media it placed via KSL. Gottlieb contends that the deal is legally voidable and has asked U.S. Bankruptcy Judge Alan Ahart to order Cumberland to pay back the fees it received by way of that pact to the KSL Estate, which would in turn distribute the money to creditors.  

Liebowitz and Cohen also allegedly received payments as part of that deal, which Gottlieb also contends should be returned to the KSL Estate.

Gottlieb will also quiz Hughes on “the nature and extent of alleged defalcations by Geoffrey Charness, any investigations thereof, and all communications relating thereto;” the “destruction, shredding, and/or removal from any of the Debtors’ business premises of any of the Debtors’ books and records,” dating to 2002, and numerous other topics.

Judge Ahart has also given the OK to Gottlieb’s demand that Hughes and his firm produce reams of documents related to its work for KSL and its principles going to back to 2002.