NEW YORK (HedgeWorld)–The appellate division of the Supreme Court of New York rejected an appeal by Kenneth Lipper, the principal of Lipper Holdings LLC, in which he objected to the trial court’s ruling that he must repay certain incentive compensation to the limited partners.

Lipper Holdings was the general partner in certain hedge funds from which Mr. Lipper received performance fees based upon numbers that since have been discredited, according to the findings of the trial court judge, Karla Moskowitz, who ordered repayment.

“For 10 years, he [Lipper] took millions of dollars based on what he claimed was growth,” in the words of one attorney involved in the ongoing litigation on behalf of the some of the funds’ investors.

The rejection of Mr. Lipper’s appellate arguments, in a Nov. 13 decision, is the latest step in a drawn-out tumble from grace for the former deputy mayor of New York. After Mr. Lipper left city government and entered the world of finance, he met movie director Oliver Stone, becoming a consultant for Mr. Stone’s “Wall Street.”

From that start he became the investment consultant to the stars and founder of Lipper & Co., which for a brief time was, or seemed to be, a very successful convertible bond arbitrage fund manager. But in February 2002, Mr. Lipper abruptly announced massive losses at its funds, and his intention to liquidate

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Pursuant to this intention, he asked the auditor BDO Seidman to look over his portfolio. They came out with a report in October that concluded that Lipper’s funds had been mispricing their assets at least since 1995.

Lipper had maintained, and still maintains, that he had been making money until early 2001. Another auditor, PricewaterhouseCoopers, backed him up on this.

Lipper has never had to declare bankruptcy, so the liquidation is voluntary, but he was soon faced with two sets of investors with sharply different views of how his funds should be liquidated and who should get what share. Some base their contentions on the PricewaterhouseCoopers numbers, others on the BDO Seidman numbers.

On April 11, 2003, Judge Moskowitz made three crucial rulings. She approved in part Mr. Lipper’s plan for distribution of the net cash assets of the investment fund limited partnerships; she held that Mr. Lipper can’t carry out that plan himself, i.e. he must be replaced as the liquidating trustee; and she held that he must repay certain incentive compensation.

The first department upheld Judge Moskowitz on each point, saying that it has considered all of the parties’ “contentions for affirmative relief” and found them unavailing.

On the issue of Mr. Lipper’s performance compensation, it said that a contract “should not be interpreted to produce a result that is absurd … commercially unreasonable … or contrary to the reasonable expectations of the parties.”

Mr. Lipper was represented by Jonathan M. Hoff, of Cadwalader, Wickersham & Taft LLP, New York. He could not be reached for comment on whether the appeal will be pursued to the next step, the state’s highest court, the Court of Appeals.

The liquidation-related litigation is only one of the many courtroom imbroglios set in motion by the failure of Mr. Lipper’s funds Previous HedgeWorld Story.

CFaille@HedgeWorld.com