Investors in the Clinton Group's $1.4 billion hedge fund unit learned today that their funds have been given a clean bill of health by the

Securities and Exchange Commission

.

The end of the investigation closes a painful chapter in the firm's history, which began when a senior trader's resignation last year triggered widespread questions about the pricing and valuation of some bonds in its hedge funds' asset-backed and mortgage-backed securities portfolios. Both the SEC and the Commodity Futures Trading Commission opened investigations in November. Clinton last month said the

CFTC had informed the firm that it had found no problems.

"We are extremely pleased to inform you that the United States Securities and Exchange Commission has informed us that based upon all the facts developed during its seven-month investigation, the SEC has determined that it will not recommend that any action be brought against Clinton Group, Inc.," the letter, which was dated Monday, said. "This means the SEC's investigation is closed."

A spokesman for the SEC said the agency does not comment on investigations.

The official word may be positive -- or at least not negative -- but the damage is done.

Clinton hedge funds had about $5.5 billion under management last August, before key staff departures and growing speculation about the state of its funds peaked with senior trader Anthony Barkan's very public resignation in October.

Investors fled in droves, and a combination of losses and withdrawals slashed the hedge fund business by about $4 billion. Its flagship $1.2 billion Trinity Fund closed after a 21.5% loss last year.

"Our portfolio valuations for the fall of 2003 were confirmed by outside auditors and legal experts retained to investigate this issue," the letter said. "We believe that these facts, and our total cooperation with regulators and auditors, led them to the proper conclusions that these matters should be put to rest with no action against Clinton Group."

The firm also manages another $4.5 billion in collateralized debt obligation pools.

"In our view, the claims by a former employee were baseless and reckless and we are happy to put the matter behind us," said the letter, signed by Clinton Founder George Hall. He described the recent investigations as "the toughest period in this firm's history."

He said auditor Ernst & Young was nearly finished with its year-end audits of its hedge funds, which would also confirm their valuations.

The fund had about $750 million under management at the end of 2003. A person who knows the firm well said three of the four remaining hedge funds were positive for the year to date. The Riverside Convertible Arbitrage Fund, the firm's second-largest, is up 4.09% year-to-date through April. The Global Investment Fund is down 1% for the year to date.