SEC opens inquiry into Man's $175m hedge fund losses

Nils Pratley
October 10, 2005
The Guardian

The United States' securities and exchange commission, the world's most powerful financial regulator, has launched its own investigation into allegations that Man Group helped to hide losses of $175m (£100m) from investors in a Cayman Islands hedge fund.

The SEC is thought to have begun its inquiry within the past week into the collapse of Philadelphia Alternative Asset Management (PAAM), a hedge fund for which Man Financial, Man's brokerage business, transacted trades. It comes as investors have started behind-the-scenes discussions to determine whether to launch multi-million pound claims for compensation against Man.

The SEC's involvement follows serious charges made by the receiver to PAAM a fortnight ago. Clark Hodgson alleged in a motion to hold Man Financial in contempt of court that the firm opened and operated an unauthorised bank account for Paul Eustace, manager of the PAAM funds, through which losing bets on the commodity markets were dumped.

Man Financial, Mr Hodgson claims, kept this account secret from investors and the fund's administrator, the Swiss bank UBS, even when losses reached a "staggering"$175m. In a statement, Man said: "We have an excellent record of regulatory engagement and compliance, and will cooperate fully with the SEC in connection with this review."

The Financial Services Authority, the UK's chief financial watchdog, has declined to comment on the allegations against Man, a FTSE 100 company worth £5bn and with $44bn under management.

Man last week suspended Thomas Gilmartin, a senior broker in its New York office who was named by Mr Hodgson as a "main contact" for Mr Eustace. It also ordered its compliance department to conduct an internal investigation and maintains: "There are a number of areas where we do not agree with the receiver's interpretation of information obtained during his investigation."

Mr Gilmartin was an investor in PAAM, the receiver alleges in his court motion. Such an arrangement between prime broker and client - if proved - would be unusual, according to hedge fund experts.

Man is also accused by Mr Hodgson in his motion of refusing to disclose documents relevant to his inquiry and his efforts to recover money for investors, namely "correspondence, notes, email, memos, computer files, audio tape or other records from the files of Thomas Gilmartin".

Man says it has cooperated fully with Mr Hodgson's investigation. "We have provided more than 4,200 pages of documentation at the request of the receiver, and have offered to meet him to discuss any further requirements that he has - an offer that has to date been ignored."

Man has not been charged with any offence. Legal action by the commodities futures trading commission, the US regulatory body that launched its investigation in June, has been confined to charges of fraud against Mr Eustace and PAAM.

That has not stopped PAAM investors discussing the possibility of litigation against Man. Stanley Pantowich, a founder of $4bn New York money manager TAG Associates, which invested with Mr Eustace, told the Bloomberg news service last week: "Either they [Man Financial] were complicit or stupid, and in either case they should owe the investors."

Such openness is unusual in the world of hedge funds and reflects the furore the affair has caused within the industry. Reasons include the size of the apparent trading losses and the speed with which they seem to have been incurred - between February and May this year.

Thomas Gilmartin, the Man Financial broker at the heart of the inquiries, may have known Paul Eustace for about 20 years. Mr Eustace, head of the collapsed Cayman Islands fund, and Mr Gilmartin attended Wharton business school at the University of Pennsylvania in the 1980s. Mr Gilmartin gained a Bachelors of Business Administration in 1988. Mr Eustace received a BSc in economics the previous year.

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