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An investment firm that owns the exclusive license to peddle Standard & Poor's hedge fund indices as trading proxies is being haunted by its close ties to



PlusFunds, an eight-year-old firm started with seed money from several top Wall Street banks, is scrambling to avoid becoming the latest casualty of Refco, the derivatives brokerage that collapsed three months ago in an accounting scandal. The latest allegations involve loans and cash payments to a PlusFunds principal with ties to the bankrupt brokerage.

Many of PlusFunds' travails were

reported earlier by

In December, Refco's creditors cried foul when it came to light that money managed by PlusFunds had been transferred out of a Refco account just prior to the brokerage's implosion. The creditors alleged in a lawsuit that the assets should have been subject to the same strictures as any Refco asset that was frozen when the brokerage filed Chapter 11 in October.

PlusFunds, which has close ties to Refco itself, has two main businesses. It manages about $2.5 billion in assets via mutual funds that mimic a portfolio of indices designed by Standard & Poor's to gauge the performance of hedge funds. It also sells the right to run funds based on those indices to other money managers, including a number of big foreign companies such as

Deutsche Bank

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United Overseas Bank




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The first business took a major hit last month when a bankruptcy court judge, in response to the lawsuit filed by Refco's creditors, froze $312 million in an index fund that had been jointly managed and marketed by PlusFunds and Refco. The order signed by Judge Robert Drain effectively prohibits investors from redeeming money in the

Sphinx Managed Futures Fund

until the dispute is sorted out. ("Sphinx" is the brand name under which the S&P hedge fund indices are licensed.)

More details are now emerging from the suit, which was unsealed this week in New York. One of the more serious allegations is that Refco made a series of loans and cash payments totaling $208 million to Chris Sugrue, PlusFunds' co-founder and chairman, who is himself a former top Refco executive. The loans were used by Sugrue last year to buy out some of PlusFunds' minority shareholders. In the lawsuit, the creditors say some of the proceeds may even have gone to a company Sugrue controls.

Officials with PlusFunds decline to comment on the litigation. Sugrue did not return a phone call. But in court papers, lawyers for the firm deny any wrongdoing.

Until Oct. 11, the Sphinx Managed Futures Fund's assets were held in a Refco brokerage account. On that date -- just six days before Refco filed Chapter 11 -- PlusFunds got Refco to transfer the $312 million in fund assets to an account at

Lehman Brothers

( LEH). The transfer occurred a day after Refco disclosed that former CEO Phillip Bennett allegedly hatched a scheme to keep hundreds of millions of dollars in customer trading losses off the firm's book.

The Refco creditors contend PlusFunds got "preferential" treatment from Refco and allege that Sugrue "personally appeared at Refco's offices'' to lobby on the firm's behalf. The creditors say PlusFunds got its money moved at a time Refco was refusing the same service to other customers.

In the wake of the controversy, PlusFunds' three top executives resigned. The firm says it's trying to find an outside investor to purchase the Refco loans to avoid the possibility of Refco become a controlling shareholder. As collateral for the loans, Sugrue pledged some of his shares in PlusFunds.

It's not clear if the steps PlusFunds is taking to put some distance between itself and Refco will be enough to appease several other parties to its business, including S&P and mutual funds to whom PlusFunds has sold licenses to the S&P indices.

So far, S&P, a division of

McGraw Hill

( MHP), is not saying much about the controversy. Gus Carlson, an S&P spokesman, says the credit rating agency is "monitoring the situation.''

A worst-case scenario for PlusFunds would be an attempt by S&P to use the controversy as cause for terminating their exclusive licensing agreement. If nothing else, the Refco scandal is giving other managers who use the S&P hedge fund indices pause.

Rydex Investments announced last week that it had decided to merge its Rydex Sphinx Fund, which tracks the performance of the main S&P Hedge Fund Index, into its Rydex Absolute Return Strategies Fund. Rydex took the steps after learning that 10% of its Sphinx Fund's assets were locked up in PlusFunds' Sphinx Managed Futures Fund.

Greg Drake, a managing director with Claymore Advisors, which filed a prospectus this summer to launch its own Sphinx-related fund, says the firm is studying the impact of the situation on its own plans. The Claymore fund, which was planned in partnership with PlusFunds, was supposed to mirror the performance of the S&P Equity Long/Short Index.

For PlusFunds, the Refco scandal couldn't come at a worse time, given that the firm finally seemed to be coming into its own after a rocky beginning.

Founded in 1998, PlusFunds began as a hedge fund-tracking service that at one time had dreams of going public in a splashy IPO. With the backing of S&P, accounting giant Ernst & Young and the Bermuda Stock Exchange, the company sought to provide "real time'' valuation of hedge fund shares and create a secondary market for those shares on the Bermuda exchange.

But PlusFunds, which also had early financial support from

Credit Suisse First Boston

( CSR),

Merrill Lynch

( MER) and

J.P. Morgan Chase

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, didn't really take off as a business until it inked the potentially lucrative licensing deal with S&P in 2002. At the time, the idea seemed novel enough that the big reinsurer

XL Capital

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sunk $200 million into the venture to help get it off the ground.

From the start, PlusFunds had an unusually close relationship with Refco. The firm's chairman and co-founder, Sugrue was a former senior vice president at Refco. Other employees at PlusFunds also had connections to Refco.

Sugrue, one of PlusFunds' largest shareholders, played a big role in negotiating the deal that led Austria's Bank fur Arbeit und Wirtschaft, or Bawag, to purchase a minority equity stake in Refco in 1998. Austria's Bawag surfaced in the days surrounding the collapse of Refco with a last-minute, $430 million loan to Bennett to pay down some of the overdue debts he'd allegedly moved off Refco's balance sheet.

Bawag also has a partnership agreement with PlusFunds.

Up until he was forced out of Refco, Bennett served as principal of the Refco affiliate that helped manage the S&P Managed Futures Index Fund.

But it's Sugrue, not Bennett, who emerges as a prime target of Refco's creditors in the unsealed lawsuit. The creditors allege that Sugrue was persistent in demanding that Refco quickly transfer the $312 million assets to an account with Lehman.

The creditors also allege Sugrue may have personally benefited from some of the loans that were made by Refco. The lawsuit contends that one of the loans was a $19.4 million payment that went to "an entity in which Sugrue is the sole member.''