Updated from 1:13 p.m. EST

It looks like another big hedge fund, Lancer Partners, could be on shaky ground.

Morgan Stanley

(MWD)

, an investor with the fund, recently cut its estimate of how much its stake in Lancer is worth by 83%, from $15.6 million to $2.7 million. Morgan Stanley noted that its valuation differed from the one provided by the hedge fund.

The disclosure, contained in a recent corporate filing, may be an indication that the Wall Street firm is no longer comfortable with some of the asset valuations being provided by hedge fund manager Michael Lauer.

For weeks now, there have been rumblings in the hedge fund world that Lauer's empire, which operates out of a Park Avenue office in New York City, is teetering. At one time, Lauer's group of funds, many of which are incorporated offshore, were ranked among the world's 100 largest.

But that ranking appears to be in doubt. Sources familiar with the Lancer funds claim that up to 40% of the investors have either taken their money out of the funds, or are have asked for their money back.

Lauer, who told a conference call in February that investors have asked for about 30% of their invested money back, didn't return a telephone call to comment on the Morgan Stanley markdown.

Lauer began his career on Wall Street as an analyst for a number of brokerage firms including, the old Oppenheimer and the defunct Kidder Peabody.

The troubles at Lancer come at a time that other big hedge funds have been falling on hard times, such as the

Lipper Convertible Bond Funds

,

Beacon Hill Asset Management

and

Gotham Partners

. Many of the hedge funds that have closed shop have run into problems with overvaluing the assets in their portfolios. In some cases, the

Securities and Exchange Commission

has stepped in to investigate the matter.

One of the problems at Lancer could be its investment in thinly traded penny stocks; in a number of instances the fund also lent money to such companies. A review of SEC filings reveals that some of the companies in which Lancer has big equity stakes include household names like

Magic Lantern

(GML)

,

World Wireless Communications

(XWC)

, and

Cross Media Marketing

(XMM)

.

Lancer, for instance, has a 29% equity stake in Cross Media, a New York-based marketing company that currently trades around 39 cents a share. Last year federal officials accused Cross Media of engaging in illegal sales practices.

Controversy is nothing new to Lancer.

Last year one of the hedge fund's employees, Bruce Cowen, was charged by federal prosecutors with taking part in an alleged kickback and stock manipulation scheme involving restricted shares of

Lighthouse Fast Ferry

-- a company the Lancer Group owns a 62% stake in. The New York City-area ferry company filed for bankruptcy in January.

The indictment identifies Cowen as a "managing director'' of the Lancer Group and "chairman'' of another firm, Capital Research. The indictment, brought by prosecutors in Florida, doesn't charge Lancer or anyone else associated with the hedge fund.

Prosecutors contend Cowen and two other men attempted to transfer some 3.1 million shares of restricted stock that Lancer owned in Lighthouse to Capital Research, as part of an alleged scheme to sell those shares to a "fictitious foreign mutual fund,'' set up by the FBI as part of a sting operation. The fictitious fund would pay $5 million for the share, of which Cowen and his associates would keep $600,000 as an "undisclosed payment.''

Cowen has pleaded not guilty to the charges. His lawyer, Robert Anello, said Cowen "did not commit a crime and did not intend to commit a crime.''

Capital Research, meanwhile, shows up as a shareholder and consultant in a number of penny stocks Lancer is an investor in, according to SEC records.