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Infowars’ Bankruptcy Judge Removes Top Advisors, Orders Probe (1)

Sept. 21, 2022, 1:45 PMUpdated: Sept. 21, 2022, 4:25 PM

Infowars’ parent is facing a major setback in its Chapter 11 case after a bankruptcy judge removed its top attorney and chief restructuring officer for their failure to disclose prior connections to company founder Alex Jones.

Texas bankruptcy Judge Christopher M. Lopez on Tuesday evening sided with the Justice Department’s bankruptcy watchdog and rejected motions by the parent company, Free Speech Systems LLC, to hire attorney Kyung Lee or his firm, Shannon & Lee LLP, as the company’s bankruptcy co-counsel.

The judge also directed the case’s bankruptcy trustee to examine Free Speech Systems’ financial affairs, operations and insider relationships. The order follows creditors’ complaints that the company is using intricate corporate structures to hide assets that could be used to pay claims. At least one company affiliated with Free Speech Systems, now claiming to be a creditor, is controlled by Jones’ and his family members.

Lopez’s rulings put Jones back in charge of the business, according to R. J. Shannon, a partner at Shannon & Lee. “It clearly hinders administration of the bankruptcy case,” Shannon told Bloomberg Law. “There may be a way to make lemonade, but that will be for someone else to attempt.”

Free Speech Systems filed for Chapter 11 protection in July after Sandy Hook Elementary School shooting victim families won judgments against far-right conspiracy theorist Jones and his website for falsely claiming the massacre was a hoax.

Lee and his firm have potential conflicts due to their representation of three other Jones-affiliated companies in a previous bankruptcy, the court found Tuesday. That created a conflict of interest that is adverse to Free Speech Systems’ bankruptcy estate, it said.

Free Speech System’s motion to employ W. Marc Schwartz as its chief restructuring officer was also denied. Lee and Schwartz had been working for the debtor for months. Schwartz had begun preparing a bankruptcy plan that would use the company’s disposable income to pay creditors.

“I do think there was some lack of candor in this case,” Lopez said. “I’ve expressed concerns since the first hearing about what happened. And as this case has progressed, and based on what I’ve heard today and the evidence that I was able to review, those concerns continue to exist.”

The removal of Lee and Schwartz could “decapitate” the bankruptcy and the debtor, Free Speech’s remaining lawyer, Raymond Battaglia of the Law Offices of Ray Battaglia PLLC, told the court. Without them, Battaglia will also consider stepping down if he can’t find replacements, he said.

“I can’t do it myself,” Battaglia said.

In June, three Jones-affiliated companies—InfoW LLC, IWHealth LLC, and Prison Planet TV LLC—struck a deal with the Justice Department’s US Trustee to dismiss their bankruptcy cases pending in Texas.

Schwartz and Lee also for a time worked with those three debtors during the previous bankruptcy but never disclosed the relationship to the court, the US Trustee said.

Shannon told Bloomberg Law that he and his firm disagree with the outcome. But Lopez “clearly put a lot of thought into his decision,” he said.

One of the trustee’s tasks is to investigate a roughly $54 million secured claim held by PQPR Holdings, Free Speech’s vitamin supplement supplier in which Jones and his parents have ownership interests. The trustee will also have the power to examine Free Speech System’s credit card processor for insider relationships, and other transfers, Lopez said.

Jones and Free Speech are facing a second defamation damages trial in Connecticut state court after some shooting victim families won defamation judgments for Jones’ hoax claims.

Last month, a Texas jury awarded two parents of a child killed in the shooting roughly $50 million in damages.

The case is In re Free Speech Systems LLC, Bankr. S.D. Tex., No. 4:22-60043, hearing 9/20/22.

(Updated with additional reporting throughout )

To contact the reporter on this story: James Nani in New York at jnani@bloombergindustry.com

To contact the editors responsible for this story: Maria Chutchian at mchutchian@bloombergindustry.com; Roger Yu at ryu@bloomberglaw.com