Screw Turning on Sacane at Durus Capital

Scott Sacane's days as manager of Durus Capital Management might be numbered, following an unusual display of shareholder activism in the loosely regulated hedge fund industry.

A group of Durus investors, at a meeting last Thursday in the Cayman Islands, ousted the board of one of the hedge fund's main investment funds and replaced it with three handpicked directors, people familiar with the situation said. The new directors also extended a freeze on redemptions at Durus.

According to these people, the shareholder meeting was organized after the former board rejected calls from the investor group to resign in the wake of Durus' unusual trading activity in two small health care stocks: Esperion Therapeutics(ESPR) and Aksys(AKSY). The old board was ousted in a unanimous shareholder vote on Sept. 4.

Neither Sacane's attorney nor his publicist were available for comment. But several attorneys who specialize in advising hedge funds said the action by Durus investors is not a vote of confidence in Sacane's management skills.

The Outcry

"Given the fact the board of directors has been replaced by the shareholders, there would appear to be very little trust between the shareholders and the investment manager," said Ron Geffner, a partner with Sadis & Goldberg. "It's not a good sign."

The investor uprising at Durus comes at a dicey time for Sacane, whose unusual trading activity in Esperion and Aksys is being investigated by the Boston office of the Securities and Exchange Commission.

Sacane claims his $400 million hedge fund "inadvertently" acquired huge equity stakes in Esperion and Aksys over the past year, but realized it only this summer. He disclosed recently that roughly 70% of his 2-year-old hedge fund's assets are tied up in those two small stocks.

Durus investors are in a bind because Sacane was forced to sign agreements with Esperion and Aksys that bars the hedge fund from selling any shares until the end of the year. That means Durus can't do much trading without liquidating its holdings in a smattering of other health care stocks, including Allos Therapeutics(ALTH) and Novoste(NOVT). Indeed, that's something Sacane has begun doing, according to recent regulatory filings.