Matthew Goldstein

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Fritz Hollings Wants His Money Back

Matthew Goldstein

Embattled hedge fund manager Kenneth Lipper has more to worry about than piquing the wrath of celebrity investors like Julia Roberts and Matt Lauer -- he's got a U.S. senator breathing down his neck.

The trustee of Sen. Ernst "Fritz" Hollings' blind trust is suing Lipper over the collapse of Lipper's onetime $4 billion hedge fund business, seeking to recoup the $116,000 the trust allegedly stands to lose on its investment. The senator also is suing PricewaterhouseCoopers, the big accounting firm that audited the books for Lipper & Co.

Hollings, a South Carolina Democrat who unsuccessfully ran for president in 1984 and is the ranking minority member on the Senate Commerce Committee, has been an investor in the Lipper Convertibles fund -- the biggest of Lipper's three hedge funds -- since 1993.

In the most recent election cycle, the Center for Responsive Politics reports that Lipper & Co. gave $21,000 to Hollings political campaign -- ranking them within the senator's top 20 donors.

Reduced Returns

At one point, the Hollings' trust investment in the Lipper fund was valued at $622,504. But by the time Lipper announced early last year that the fund suddenly had lost 40% of its value, the senator's investment was whittled down to $319,650. It's not known how much Hollings initially invested in the Lipper fund.

The lawsuit, filed in a South Carolina federal court, claims Lipper not only misled Hollings and other investors about the declining value of their investments, but gave preferential treatment to several investors in the fund, including New York Daily News publisher Mort Zuckerman and some of Lipper's own family members.

The Hollings lawsuit filed on Jan. 3 is the latest turn in a Wall Street soap opera that once again illustrates the high-risk game of sinking money into a hedge fund -- loosely regulated investment vehicles that cater mainly to the rich.

At a time when dozens of hedge funds are going out of business, there has been no more spectacular collapse than that of the Lipper funds. A New York state judge currently is overseeing the liquidation of the hedge fund, which last February suddenly reported losing $315 million in its main convertible bond fund.

The demise of the Lipper fund has sparked at least two putative class-action lawsuits and investigations by the Securities and Exchange Commission and the U.S. attorney's office in Manhattan. Among the things federal investigators are believed to be looking into is Lipper's contention that his management team, unbeknownst to him, was mispricing and misvaluing its investments for several years.

More to Come?

Over the coming months, the number of lawsuits filed against Lipper and PriceWaterhouseCoopers is expected to rise -- especially as more information begins to come to light about how Lipper's team allegedly ran the funds into the ground. Lipper's management team made more than $44 million overseeing the funds.

Lipper's primary convertible bond fund marketed itself as a relatively low-risk way for investors to achieve "equity-like rates of return." Lipper, a former New York City deputy mayor, Wall Street banker and Hollywood producer, used those connections to sign up more than 350 investors -- including actors, financiers and institutions including George Washington University and the CNA Employees Retirement Trust(CNA).

The fund's marketing brochure said it would invest 70% of its assets in investment-grade convertible bonds -- a hybrid security that pays both interest and converts into stock when the issuing company's shares reach a certain price. The fund sought to hedge its exposure to the bonds by buying short positions in the issuing companies' stock.

However, there's some evidence that the Lipper funds may have deviated from that relatively low-risk strategy, and instead bought shares in risky convertible bonds and other bonds issued by telecommunication companies like Global Crossing, McLeod Communications, Loral Communications(LOR) and WinStar Communications -- all of which carried junk ratings. Of those companies, WinStar is now out of business, Loral is struggling and Global Crossing and McLeod are in bankruptcy.

An allegation that the Lipper funds may have inappropriately invested in high-risk securities is contained in a federal class-action filed this week in Manhattan federal court by R. Joseph Barton, one of the lawyers for Fredda Levitt, who invested $2 million in the fund.

It is also raised in an earlier lawsuit filed by Race Rock Corp., which sunk $5 million into Lipper's hedge fund. In the Race Rock litigation, filed in New York state court, there are allegations that the fund's holdings "were not invested substantially in investment-grade securities."

Playing Favorites

While the Hollings suit doesn't contain any allegations about inappropriate junk bond investments, it includes other potentially embarrassing charges for Lipper.

Specifically, the Hollings trust contends that Lipper allowed Zuckerman to withdraw his $12 million investment in the fund a month before he told other investors that its asset value suddenly had plummeted. The lawsuit similarly alleges that Lipper withdrew $3.1 million of his own money from the fund prior to the announcement.

A spokesman said Zuckerman hadn't seen the complaint. A spokesman for the Lipper Funds declined to comment. John West, the trust's administrator and a former South Carolina governor, also could not be reached for comment.

Camden Lewis, the attorney for the Hollings trust, called the January 2002 withdrawals by Zuckerman and others unusual. He said the trust brought its own lawsuit because the other litigation is moving slowly and the senator would like to get his money back.

"It's important to get this moving," said Lewis, a partner with Lewis Babock & Hawkins in Columbia, S.C.

The Hollings lawsuit also sheds some light on how the senator came to invest in the fund.

The court filing contends that Lipper owns real estate investments in South Carolina, and during a visit to the state in the early 1990s, discussed the fund with the senator. Lipper visited Hollings at the senator's home on Isle of Palm, S.C. The senator was impressed enough with Lipper's presentation that he set up the blind trust to oversee an investment in the hedge fund.

One of the selling points, according to the court papers, was Lipper's claim that he would "personally be involved with day-to-day management of the fund" and that Lipper intended to invest his own money in the fund.