Managing Bankruptcy Matters For Athletes: A Case Study

Monday, January 23, 2012 - 14:31

The Editor interviews Ira Spiegel, Director, EisnerAmper.

Editor: Please tell us about your background and current practice.

Spiegel: I started in public accounting as an auditor, was hired away by a client and spent 15 years in private industry as a controller, corporate controller and vice president of finance until the recession of the early nineties resulted in the company being sold. I entered the world of forensic accounting with a small boutique firm that did only bankruptcy work, litigation support and forensics. Since 1993, I’ve been doing just that: bankruptcy and forensics, with the last ten years at major firms.

Prior to my seven years with EisnerAmper, I handled Chapter 7s relating to professional athletes, the most notable being Earl “the Pearl” Monroe but also others with similar problems. I’ve also dealt with entertainment industry situations and other high net worth clients, including one gentleman who, prior to his financial collapse, was ranked among the top ten wealthiest people by Forbes. Michael Vick is the first professional athlete I’ve worked with who filed into Chapter 11.

Editor: When working with clients who acquired wealth suddenly, how do you help them make solid financial decisions when bankruptcy issues arise?

Spiegel: I provide professional assistance to them as debtors in their Chapter 11 cases, helping them through the bankruptcy process and then working with the attorneys to create a reorganization plan that will allow them to go on with their lives while dealing with their creditors. As the Chapter 11 case progresses, besides the standard work, I also help them get control of their spending and finances as well as establishing a better, more realistic investing and saving strategy for the future.

Editor: What are the most common causes of bankruptcy?

Spiegel: The most common causes relate to the sudden increase in standing and wealth, particularly for young and highly talented athletes who get the bigger contracts. There’s a lack of self-control, overspending – maybe due to a desire to take care of their family and look good to their friends.  Unfortunately, they often don’t have the right type of advisors working with them. They figure they have a multiyear contract, and the money is going to keep coming. They may not focus on the difference between the value of the contract and their actual take-home pay. Then one day the money isn’t there, and they had no real planning for their future.

Editor: How often do injuries and other impediments to their ability to play figure into the sudden drop in income or wealth?

Spiegel: That is a key factor, primarily in football, with the typical career of an NFL player lasting only three seasons unless further shortened by injuries. Unfortunately, most NFL contracts are only guaranteed season by season, based on the player being on the opening-day roster. Their contract for that season is guaranteed,and they are protected if they get injured during that season. If they have, for example, a three-year contract that is not covered in full or in part by an extended guarantee and they can’t play the last two years, they would not be guaranteed money. So injury is a key factor.

Players with extended guarantees are guaranteed against injury but not against being cut by their team due to poor performance. So again, while they think they may have a three- or five-year contract with several years guaranteed, they may wake up one day and find out the income stream is gone.

The other problem for many athletes recently (including Mark Brunell, the backup quarterback for the New York Jets who filed a personal Chapter 7) is that their advisors had them heavily invested in real estate. When the real estate market collapsed, it brought Brunell and others down. Many of Mike Vick’s issues related to being put into real estate partnerships by advisors, which was one of the issues he was dealing with when deciding to file for bankruptcy.

Editor: Please talk about the Michael Vick matter.

Spiegel: Obviously, the dog-fighting issue contributed to Michael’s financial problems, but he filed for personal bankruptcy due to a judgment creditor and the collapse of numerous real estate partnerships he had been put into by one particular advisor. These deals were structured in such a way that Michael was the sole member guaranteeing the bank loans, and when the partnerships collapsed, the banks came looking for him.  

At that point he was already in prison with no stream of income, so his only option was to file for Chapter 11. I first got involved with him about two months into his bankruptcy case through my relationship with one of the main attorneys in the New York firm handing the matter. I came in after the case was filed and worked until we got Michael to a confirmed reorganization plan. The case remains open, but he is technically out of the bankruptcy court while we move forward with his plan and the payments required under it.

Editor: How do you coordinate with legal or other advisors in handling financial matters for sports and entertainment celebrities?

Spiegel: We usually get involved when attorneys ask for our professional assistance, and the debtor gets the final say. Our services include the standard required financial analyses and monthly reporting mandated by the bankruptcy code: analyzing the claims, advising on taxes, and assisting in the financial structuring of the plan as we work with them through the bankruptcy case. Unlike Michael Vick, debtors typically have a continuous stream of income throughout the bankruptcy process and are allowed to live within certain parameters, and it’s up to us to help them stay within these limitations and establish that they are able to come out of bankruptcy. They must have a feasible plan for paying their creditors and demonstrate that they are in control of their spending and other issues. Once they get a confirmed plan, our involvement usually terminates unless they want to retain us after confirmation for the work needed until a final decree is issued or for typical accounting needs.

In the Michael Vick situation, due to my work throughout the case, the extensive liquidation analysis and cash flow/budget/creditor payment projections incorporated into the plan and my testimony at the confirmation hearing, the judge, in an uncommon decision, ruled that he would only confirm the plan on the condition that Michael continue to retain my services for at least the first two years under the plan. This was made part of the confirmation order. Thus, Mike and I have continued on. Based on my work, in collaboration with colleagues in our tax group, royalty group and other practice areas as needed, including high net worth services, he and I have gone beyond the two-year minimum in the confirmation order and plan on a long-term relationship.

Editor: What are the key concerns for athletes during bankruptcy?

Spiegel: The key is to protect their careers, especially in a Chapter 11 where future income is the key to a plan. Obviously, you can’t control injuries, but players can mitigate the risk of damaging or losing their careers by strictly adhering to their contract provisions and to the NFL’s standard code of conduct. They need the right team of professionals, an attorney and financial advisor, working with them. They also must involve the team of professionals to validate the integrity of marketing and endorsement deals and other situations thrown at them, such as name licensing, clothing lines and investment opportunities. The league and their team provide some control, but professional athletes have the option to enter into independent deals – so it’s important to work with people who are reputable, making sure the deal is in their best interest.

Editor: What are the key financial and reputational issues for athletes post-bankruptcy?

Spiegel: In Michael’s case, and this is how it should be done for all, part of the plan we proposed to the court involved a monthly budget, based on his known expenses, with some flexibility. It’s my job to keep him on budget. I built a contingency into the overall budget for certain items that we cannot take out of his monthly expense allowance but that would still be monitored and controlled. I work with him constantly to make sure he stays within those parameters and meets the requirements of the plan. In addition, since the signing of his current contract, people have approached him claiming that they are owed money from before his bankruptcy or trying to get him into new deals. Michael advises them that they have to contact me and, as needed, I get the attorney involved.

In terms of reputational issues, I am part of the process to help the athletes avoid negative press, though in Michael’s case, everything gets into the papers. I work with Michael’s PR people continually. I also work with other EisnerAmper groups in reviewing and formatting proposed deals and with the attorney who works with him on these proposed deals. As an example, over the summer two competing energy drink companies pursued Mike, both claiming he signed with them. We worked on that with the attorneys and the PR people to resolve this, which included keeping them informed about the impact on the bankruptcy process or any other potential issues.

I worked with his agent in structuring his current contract with the Philadelphia Eagles, including factoring in its impact on the requirements under the bankruptcy plan.  There have been numerous significant issues requiring the involvement of myself and other EisnerAmper professionals. The goal, of course, is to minimize situations that require a response from an attorney, the accountant and the PR people, but unfortunately in today’s world, with everybody having a cell phone camera, it’s hard not to get caught doing something that can be made to look bad or is easily misrepresented.

Editor: Do sports organizations maintain specific policies for athletes with respect to their finances?

Spiegel: The policies tend to state you can’t do anything detrimental to the team, the owners, your teammates or the image of the league, so it’s more of a personal conduct policy than one that encourages fiscal responsibility. The NFL has a program for rookies where they bring in a qualified financial advisor to help them understand how to be careful and invest wisely, whereas the focus of my practice has grown out of the bankruptcies.

For instance, I’ve been talking to Michael and his sports agent about contacting other players to provide them with a mechanism very similar to what we created in the bankruptcy process for Michael, i.e., to assist them with proactively controlling and budgeting their money, building a savings line, and staying out of the trouble that could lead to a bankruptcy filing. This way, even if their career is short and they have to look for a second career, they will have money from their playing days as the starting point.

Editor: Did the Madoff scandal affect many in the sports world?

Spiegel: I’m not sure about athletes who were in with Madoff, but athletes and entertainers do get caught up in Ponzi schemes. One of Michael’s former advisors from his days with the Atlanta Falcons actually pled guilty to operating a Ponzi scheme. The bankruptcy case also included actions against her for removing moneys from his accounts and from the pension plan in the company set up to help handle his marketing. So athletes have exposure to people who approach them with Ponzi schemes and other shady deals; in many cases, one athlete will rely on another athlete to refer them to an advisor without doing proper due diligence, and they sign on with the advisor. Then somewhere down the road, both athletes get burned.

Editor: Please talk about the value of EisnerAmper’s reputation in these sensitive matters.

Spiegel: First, keep in mind that everything about a bankruptcy is technically public record. Right now, I am focused on ensuring that Michael doesn’t make more bad decisions like those he was led into in the past. We’ve been able to do certain things for him because of my and other members of my group’s knowledge of both taxes and bankruptcy, and the expertise in our tax and financial services groups, all working together. I don’t know if there are many other accounting firms that would have been able to accomplish what we’ve done for him because of having to coordinate personal-life tax returns with bankruptcy estate tax returns. We’ve advised him on situations involving our royalty and tax groups in the structuring of recent licensing endorsement and marketing deals and tried to dissuade him from deals that we didn’t feel were structured to his benefit.

EisnerAmper’s only interest is in providing services to the advantage of Michael or any other professional athlete. We serve as an advisor and are paid on a fee basis, so everything we do is in the best interest of the client – not tied to trying to sell our clients a package or a financial product. There have been athletes on other teams who have come directly to us after doing their homework, saying they want to work with our high net worth group, and that’s because of our overall reputation.

Please email the interviewee at ira.spiegel@eisneramper.com with questions about this interview.