A group of investors in the Beacon Hill Asset Management hedge fund, currently the subject of both criminal and regulatory investigations, is suing an investment-management firm that owns a controlling stake in the fund for alleged fraud. The lawsuit, filed Tuesday in a Manhattan federal court, claims that Asset Alliance, a $4.5 billion hedge fund incubator and investment-management company, knew or should have know that Beacon Hill's managers "artificially inflated" the funds' returns last summer. Beacon is among a long list of big hedge funds that have fallen on hard times in the past year. Others include Lancer Partners, the Lipper Convertible Bond Funds and Gotham Partners. And like Beacon, there have been allegations that each of these hedge funds overvalued the assets in their portfolios. Asset Alliance, which provides seed money to about a dozen hedge funds, owns a 50% equity stake in Beacon Hill. A spokesman for Asset Alliance, which is managed by former Wall Street investment banker Bruce Lipnick, couldn't be reached for comment. The Securities and Exchange Commission moved to shut down Beacon Hill last fall, after claiming the hedge fund misled investors about how it lost an estimated $400 million in the mortgage-backed securities market. At one time, Beacon Hill, based in Summit, N.J., was one of the biggest hedge funds in the mortgage-backed securities market. At its height, the six-year-old hedge fund managed about $2 billion in assets and even counted a Morgan Stanley ( MWD)
investment partnership as an investor. The 32 investors who filed the lawsuit collectively sank more than $79 million into Beacon Hill. In addition to Asset Alliance, they also are suing the hedge fund and its four-member management team. The investors include several offshore investment funds, along with a number of individual investors from the United Arab Emirates. The filing of the investor lawsuit comes roughly two months after federal prosecutors in New Jersey initiated a grand jury investigation into the problems at Beacon Hill. The New Jersey U.S. Attorney's Office is looking into allegations of securities fraud and other misconduct at Beacon Hill.
The SEC, in a civil complaint filed last November, contends that Beacon "materially overstated" the net asset values and returns it was earning on all of its funds from July 31 through Sept. 30. Regulators contend that during those months, the hedge fund allegedly misled investors by sending them a series of email messages that purported to be a true picture of the performance of its funds. The SEC, with the consent of Beacon Hill, moved the remaining $500 million in the fund to Ellington Management Group, a Connecticut-based hedge fund that's also a big player in the mortgage-backed securities market. The investor lawsuit contains many of the same allegations raised by securities regulators against Beacon Hill. But it goes a step further in also charging Asset Alliance with having "culpably participated" in the alleged misrepresentation and fraud at Beacon Hill. The investors contend that Asset Alliance helped Beacon Hill market its hedge funds. Asset Alliance allegedly also monitored the performance of Beacon Hill. Every day, Asset Alliance received an update on Beacon Hill's portfolio holdings from Bear Stearns ( BSC), the investment bank that provided brokerage services to the hedge fund. The investors' lawyer, Scott Berman, partner with Brown Rudnick Berlack & Israels, said Asset Alliance helped Beacon Hill conceal its "poor performance." Asset Alliance, meanwhile, contends it was duped by Beacon Hill just like the fund's investors. In January, Asset Alliance filed an arbitration claim seeking to recoup its $500 million investment in Beacon Hill. From a practical standpoint, it makes sense for the investors to pursue Asset Alliance because it would appear to have much more money than the Beacon Hill defendants, which include John Barry, the hedge fund's founder and president.
Asset Alliance is managed by Lipnick, a former vice president at Ladenburg Thalmann, a New York investment bank. In 1998, Asset Alliance filed plans to go public in an initial public offering led by Bear Stearns, but it postponed the planned $92 million offering. One of Asset Alliance's principal minority investors is the insurance firm Arthur J. Gallagher ( AJG). In the fourth quarter of 2002, Gallagher recorded a $3.5 million charge, stemming from what the insurer described as the potential "negative" fallout from Asset Alliance's relationship with Beacon Hill. The insurer is believed to own a 25% equity stake in Asset Alliance.