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.