Morally Bankrupt

Greed, Lust, and the Scandal That Shook Big Law

By: Alexander Gladstone, Andrew Scurria

An explosive investigation into a scandal at a federal courthouse in Texas, revealing how the nation’s corporate bankruptcy system was compromised at the expense of everyday Americans—told by the Wall Street Journal reporters who broke the story

Most Americans think of bankruptcy as a demise to be avoided at all costs, but major cases can be a golden opportunity for high-powered lawyers and their clients on Wall Street. Steering a distressed company there can allow a firm to engineer big paydays for corporate executives and financiers in deals that often leave their adversaries with pennies on the dollar.

Over the past decade, white-shoe law firms flocked to the Houston court of Judge David R. Jones, the nation’s most powerful and influential bankruptcy judge, where he and his colleagues presided over the restructuring of major American businesses including JCPenney, Neiman Marcus, Chesapeake Energy, Men’s Wearhouse, Chuck E. Cheese, and Regal Cinemas. Judge Jones quickly became known for ruling in favor of the corporate debtors those lawyers represented and the well-positioned private equity firms and hedge funds they struck deals with. Those with elite representation seemed to have the inside track—they kept getting what they wanted while smaller investors, unpaid vendors, and retirees were often told that the pie just wasn’t big enough for them to get the piece they were owed.

One of those outsiders to Jones’s court discovered that the judge, who often preached about the “integrity of the process,” was harboring a personal secret that threatened to undermine faith in the federal judiciary. He teamed up with a crew of other people who felt they were wronged, making a stand against the Houston machine that would pit them against some of the world’s most powerful law firms and a justice system that had become twisted to benefit the connected few, with ramifications for all Americans.