The Rumor That Just Won't Die

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Wall Street revels in rumors, and lately the rumor mill has taken on a new viciousness. Lehman Brothers had to squelch accusations Friday that losses in emerging markets would sink the venerable firm, and other talk centered on which hedge fund has suffered the biggest losses in the markets' recent meltdowns.

Right in the middle of these is

Leon Cooperman

. Talk that his

Omega Advisors

hedge fund is reported to have lost at least several hundred million dollars in the latest emerging markets maelstrom just won't quit. Scuttlebutt regarding high-profile defections continue to swirl around his firm, including that of long-time friend and second-in-command

Charles Leeds

, a skillful U.S. equity stock picker.

And Wall Street loves it.

The Street is wallowing in schadenfreude, relishing the fall from grace of investment geniuses, some with secretive, schizophrenic-like personas -- like

George Soros

, who admitted losing $2 billion in Russia -- and some publicly acknowledged loose cannons -- like Cooperman.

Omega attracts more attention than most hedge funds, perhaps because its chief has had more than one roller-coaster ride with emerging markets. Plus Cooperman, a former partner with

Goldman Sachs

, has an uneasy relationship with the press, luxuriating in media attention when his savvy market calls were making headlines, cursing it when the market turns and bites.

"We don't deal with the press," barks someone who answers Cooperman's line at Omega, claiming to be his executive assistant. "Who's this?"

Actually, it's Cooperman who's on the phone. And he's ticked-off.

Wall Street doesn't care, Cooperman tells

TSC

, that no one has left his firm since Aug. 28, when he

fired four people from his emerging markets team, including

Clayton Lewis

, for Russia-related losses.

Joe Sheer

and Leeds, who is set to retire, both were rumored to have left already. But Cooperman says they are still working at Omega.

"Who are you talking to who's telling you something different?" he bellows into the phone. "Obviously you're speaking to

a source who's an a#$*&@!. No one else has resigned."

But the market's drawn blood, and that's why rumors of defections won't die. Cooperman's fund will have a hard time making performance fees this year. Why? Hedge funds earn their performance fee based on returns, and Omega's losses this year reportedly are so big, the principals have little hope of making it up in the final stretch.

Does that mean his stable of superstars --

John Lattanzio

, of

Steinhardt Partners

and Goldman Sachs fame, joined by

Paul Mastroddi

the esteemed chief economist who made a fortune for

J.P. Morgan

, and Cooperman's old friend Leeds -- won't make any money? Of course not. They've already cashed in.

"A lot of these guys had contracts guaranteeing a share of the profits, but in order to attract them, Cooperman had to write them million-dollar checks out of his own pocket," says one hedge fund advisor who spoke anonymously. "They've been paid, they know the fund can't reach the high water mark, and they're waiting to walk."

Cooperman hands the receiver to Mastroddi. "I haven't resigned," Mastroddi says, a little too cheerily. "I haven't even had an interview." In fact, Mastroddi says, he just walked out of a strategy session with Lattanzio himself.

According to a Sept. 8-dated letter sent to Omega investors, Russian debt represented just 0.1% of Cooperman's entire portfolio. His other picks in emerging markets sound traditionally astute: Omega also held shares of Russian natural gas giant and blue chip giant Gazprom, amounting to roughly 0.2% of assets, and 1.6% of assets were represented by a private equity holding in

Socar

, Azerbaijan's national oil company.

Still, Wall Street drools, and Cooperman can't stop the talk. Adds a former employee of Omega: "There should be some real question as to whether Lee has the ability to continue."