NEW YORK (HedgeWorld.com)--A group of investors is attempting to recoup its $200 million loss from hedge funds run by Wood River Capital Management through a suit against the manager's law firm as well as the administrator and auditor.
The main argument is that the defendants knew about the portfolio's excessive concentration in one stock and knew that Wood River returns were not being audited, yet participated in creating various documents that misrepresented these matters.
"In a real sense they made the Wood River fraud possible," said Constantine Karides, a partner at Reed Smith LLP representing the plaintiffs, in a statement.
The plaintiffs, described as institutional investors, are led by Edison Fund Ltd. in the Cayman Islands, and include Fairfax Fund, Nucleus Fund and Shakti Fund, all of the Caymans, Sonata Multi-Manager Fund LP in Denver, Colo., and LHS Ventures Ltd. Partnership in Chicago. Several of them bought interests in the funds from BNP Paribas, the bank.
Seward & Kissel LLP, a New York-based law firm that prepared the Wood River funds' offering memoranda, is a defendant in the suit. It is accused of knowing, or being reckless in not knowing, that the offering documents contained wrong information and the diversification provision was violated by the manager.
The plaintiffs are demanding both actual and punitive damages from Seward & Kissel for willful and/or reckless misconduct. The law firm, which touts its hedge fund expertise on its web site, did not respond to several calls for comment.
While the offering documents apparently claimed that the funds were diversified, John Hunting Whittier, the manager of Wood River, accumulated so much stock in a small-cap firm named End Wave Corp. that the position accounted for 65% of the portfolio. When End Wave went down in the summer of 2005, the hedge funds collapsed.
The offering memo claimed that Wood River's financial statements were audited by American Express Business and Tax Services Inc., which later became RSM McGladrey Business Services Inc., and is a defendant in the suit.
After the Securities and Exchange Commission filed suit in October 2005 against Whittier for misrepresenting the oversight and diversification of his hedge funds, Lipper HedgeWorld quoted a RSM McGladrey spokeswoman as saying that the auditing operation had not done business with Wood River.
That suggested that Whittier falsely used the American Express/ RSM McGladrey name to mislead his clients. But the new suit suggests that in fact there was a connection between him and the auditor, although the funds were not audited.
American Express Business and Tax Services knew that its affiliate Goldstein Golub & Kessler had signed a retainer letter to be auditor to Wood River, but the hedge fund manager had not countersigned the agreement and no audit was being performed, according to the new complaint.
A managing director of the auditor told investors that an audit of the previous year was being done and was delayed because of a staff shortage. Moreover, the auditor confirmed in writing that it was indeed engaged to be Wood River's auditor. The auditor's public denial that it had any connection to Wood River is false, the complaint says.
Trident Financial Services LLC is the third defendant. It was the fund's administrator and allegedly sent out a letter with a false asset value even as the fund suffered big losses.
Law firm Reed Smith says it expects other institutional investors to join the suit and is continuing the investigation to determine what other entities or individuals may share responsibility for the debacle.
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