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10/31/2005
Update on the Milberg Weiss / Lerach Coughlin Probe
Not much new here, except for an explanation for why the investigation into Milberg's legal tactics is taking so long. In short, Assistant U.S. Attorney Richard Robinson moves at a methodical pace. But the piece is worth a read for the few new names that pop up:
Complexity Slows Milberg-Lerach Probe

Justin Scheck
The Recorder
October 31, 2005

After the dozens of news stories, flurries of grand jury activity and periodic inquiries by the Los Angeles U.S. Attorney's Office, there's one enduring mystery in the ongoing attempt to prosecute the former plaintiffs firm Milberg Weiss: Why's it taking so long? In the five years since prosecutors began probing the securities class action firm and star lawyer William Lerach, the investigation has produced a peripheral indictment, a trove of gossip and a look at some of Beverly Hills' less savory characters.

But it hasn't resulted in charges against its presumed targets. Lawyers familiar with the case cite a handful of contributors to the investigation's length: the difficulties of prosecuting a lawyer, the need for circumspection in going after deep-pocketed, high-profile attorneys, and a one-year fight to disqualify Milberg Weiss' defense counsel. But most of all, they ascribe the delay to a single person: Assistant U.S. Attorney Richard Robinson, the lead prosecutor in the case.

Robinson, according to several former prosecutors speaking on condition of anonymity, is known for moving at a methodical pace, spending as much time as he is allowed to gather documents, interview witnesses and develop cooperators before filing an indictment. While this quality has a tendency to frustrate defense attorneys -- and sometimes fellow prosecutors -- Robinson is known for developing particularly thorough indictments.

"I think most prosecutors, when dealing with a high-profile entity and partners of the entity as targets, will move cautiously and deliberately," said Walter Brown Jr., a partner at Orrick, Herrington & Sutcliffe and a former L.A. federal prosecutor. "If you couple that with a prosecutor who is cautious, deliberate and slow-moving, it's not that strange" to spend five years on a case.

Robinson's successes include the 2000 insurance fraud conviction of Steven Cooperman, which sparked the Milberg investigation. After his conviction for faking the theft of two paintings to collect on an insurance policy, Cooperman -- in an attempt to reduce his sentence -- told prosecutors that he received kickbacks from the Milberg firm in cases where he served as the lead plaintiff.

Since then, Robinson and several other prosecutors, including Assistant U.S. Attorney Michael Emmick -- who assisted in Kenneth Starr's investigation of President Clinton -- and, more recently, Assistant U.S. Attorney Robert McGahan, have ranged far and wide in their attempt to prosecute the firm. In addition to Cooperman, they've interviewed two other former lead plaintiffs who have immunity -- and claim to have received kickbacks.

Since 2000, the prosecutors have also been focused on Richard Purtich, a Los Angeles insurance lawyer, according to attorneys with knowledge of the investigation. Those sources say prosecutors have been investigating Cooperman's claim that -- in cases where Cooperman was the lead plaintiff -- Purtich improperly passed referral fees from Milberg Weiss on to Cooperman.

The Los Angeles Times reported in August that, in divorce proceedings, Cooperman said he took direct payments from Purtich, and that Milberg Weiss paid Purtich about $2 million to cover Cooperman's outstanding legal fees. A similar set of payments was alleged in a June indictment of former Milberg client Seymour Lazar and his lawyer, Paul Selzer.

Purtich -- whose attorney, L.A.-based William Genego Jr., wouldn't say whether his client appeared before the grand jury -- represented Cooperman in a suit against insurance companies after he faked the theft of a Picasso and Monet in 1992. And while he has never faced criminal charges, Purtich also represented another notorious Beverly Hills insurance fraudster, lawyer Rex DeGeorge.

DeGeorge, who is currently not eligible to practice law, was convicted in 2002 of artificially inflating the value of his yacht before sinking it off the coast of Italy in 1992. Purtich represented him in a suit against the company that insured the boat. The fact that Purtich -- like the investigation's targets -- is an attorney can make things especially sticky, said three former prosecutors.

"The biggest difference investigating criminal allegations against a lawyer is the very important but cumbersome process of going to Main Justice and getting permission for subpoenas and search warrants," said Patrick Robbins, a former San Francisco prosecutor and a partner at Shearman & Sterling.

In addition to navigating privilege issues, two lawyers familiar with the case said prosecutors spent nearly a year working to disqualify Williams & Connolly, the Washington, D.C., firm that had been representing Milberg Weiss, since it had briefly represented Cooperman. Williams & Connolly was disqualified about a year ago. Milberg Weiss is now represented by Bryan Daly at L.A.'s Beck, De Corso, Daly, Kreindler & Harris, who didn't return phone calls. Lerach is represented by Keker & Van Nest's John Keker.
The original article appears here.

-- MDT

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Austrian Bank Set to File Suit Against Refco
Via TheBusinessOnline:
Refco debacle widens and now involves Austrian bank

By : Joe Lauria in New York
October 30, 2005
The Business, Online

AUSTRIAN bank BAWAG is set to file lawsuits against Refco, as the widening scandal involving the US futures trader has prompted a former Refco executive to co-operate with US authorities trying to get to the bottom of the affair.

Austrian regulators last week also launched an investigation into the Refco debacle and expect to release a first report in a fortnight on BAWAG’s role in the accounting scandal. BAWAG is Austria’s fourth-largest bank. It was listed as Refco’s biggest creditor in papers filed by Refco in the US bankruptcy court this month. BAWAG is owed E350m ($424m, £238m) by Refco’s former chief executive, Briton Phillip Bennet, as well as E75m by Refco itself.

BAWAG, owned by Austria’s trade unions, is working with a battery of US?lawyers preparing the lawsuits against several targets, the bank said. The main target is Bennett, to whom BAWAG continued to lend money until 9 October, the day he was suspended by Refco. The next day he was arrested and charged with securities fraud and hiding $430m in debt from the company and its shareholders...

...The US probe was given a boost last week when Santo Maggio, president of the Refco Capital Markets unit, agreed to co-operate with the Justice Department and the Securities and Exchange Commission (SEC). Maggio had been put on leave by the Refco board on 10 October, the same day Bennett was arrested. As a Refco insider, Maggio’s participation is expected to help investigators pressure other executives to co-operate as they build their case. A judge last week gave prosecutors only until Monday to get an indictment against Bennet from a Grand Jury. The deadline could be extended.The US investigators have broadened their probe beyond the original charges against Bennett for hiding debt. They are also looking into the connections between Bennett and BAWAG. The SEC is also probing the role played by Grant Thornton, the accounting firm, which had audited Refco’s books. The investment banks that underwrote Refco’s $583m initial public offering (IPO) in August are also under investigation...
More details in the original article, which appears here.

-- MDT

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10/30/2005
Refco Capital Markets Pres. to Cooperate in Inquiry
Via Reuters:
Refco executive Maggio cooperating in widening inquiry

October 28, 2005
By Kevin Drawbaugh
Reuters, UK

A senior Refco executive who was put on leave earlier this month is cooperating with U.S. authorities in a widening fraud investigation of the futures and commodities broker, a person close to the case said on Thursday.

Santo Maggio, president of the Refco Capital Markets unit, was put on leave by the Refco board on October 10 when it ousted chief executive Phillip Bennett, who has been arrested and charged with hiding $430 million (241 million pounds) of debt from the company and its shareholders.

The Department of Justice and the Securities and Exchange Commission are investigating the matter and are fast moving beyond the charges brought against Bennett in his arrest warrant, said sources familiar with the matter...

...Maggio's agreement to cooperate will allow federal investigators to follow a typical pattern of obtaining information from a cooperating executive that can then be used to pressure other executives and build a case, lawyers said.


The original article appears here.

-- MDT

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10/28/2005
The Refco Detonator
According to media reports late Thursday, the name of the man who lit the fuse on the Refco bomb was Peter James, the company's new controller.

Via Bloomberg:
Bennett's deception -- missed by regulators, Refco's auditors, Thomas Lee Partners and IPO investors -- was discovered at the beginning of October by Peter James, the company's new controller. "I was working late one night and it hit me,'' says James, who started work at Refco on Aug. 3 as the company approached its IPO. "I was a fresh pair of eyes.''
Eureka...

The Bloomberg article also has extensive details regarding all the key players who've emerged thus far in the ongoing Refco investigation. Well worth a read.

-- MDT

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Volcker Probe Names Names in UN Oil for Food Scandal
Via ChristianScienceMonitor.com:
UN team names firms in oil-for-food scandal

By Peter Grier
Christian Science Monitor

WASHINGTON – In scale, the skimming operation probably ranks as one of the greatest financial crimes of all time. Iraqi insiders knew it as the "Saddam Bribery System" - kickbacks and surcharges on the United Nations' oil-for-food program that netted Saddam Hussein $1.8 billion in the final years of his regime...

..."It was well known by everyone, including the US government, that the system as constructed invited kickbacks," says James Dobbins, director of the International Security and Defense Policy Center at the RAND Corp.

On Thursday, the Volcker probe revealed that almost half of the 4,500 companies that participated in the program paid Hussein under-the-table cash, according to the report. The money involved amounted to a $1.8 billion tax on the $64 billion program, which ran from 1996 to 2003.

The accused represent virtually every nation that took part. Companies and individuals from 66 countries sent illegal kickbacks to Hussein's government, according to the Volcker inquiry. Those who simply paid an illegally high price for their oil to begin with came from 40 countries.

Among the firms named by the report are Volvo Construction Equipment, which allegedly paid $317,000 in extra fees to the Iraqi government on a $6.4 million contract. DaimlerChrysler tacked an extra $7,000 onto a $70,000 contract, according to the Volcker inquiry...

Further details and shaming to be found at the Monitor.

-- MDT

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10/27/2005
Puerto Rican Mortgage Lender, Doral Under SEC Investigation
Via Business News Americas:
Doral slashes dividend, SEC investigation widens - Puerto Rico

October 26, 2005
By Ken Parks
Business news Americas

Puerto Rico's largest residential mortgage lender Doral Financial Corporation said Tuesday night that it is slashing its dividend by 56% and that an informal SEC probe into its accounting practices has been widened to a full blown investigation.

"The company has received a subpoena from the SEC seeking the production of documents principally regarding the restatement and related financial reporting matters and the terms of certain transactions with local financial institutions," Doral said in a statement.

Doral also said it no longer expects to file its amended 2004 annual report by November 10 due to new information regarding the sale of mortgage loans to local financial institutions.

If the company's audit committee decides that a transaction does not qualify as a sale for accounting purposes, Doral would record the transaction as a loan payable secured by mortgage loans and reverse the gain previously recognized for the transaction. Doral would then be required to create provisions for those loans, according to analysts, putting greater demands on its capital.

"The company expects that it will continue to meet its regulatory capital requirements following the impact, if any, of this information on its financial statements," Doral stated.

Doral shocked investors earlier this year when it said it would have to restate financial results from 2000 to 2004 and write off US$615mn to correct how it values the floating rate, interest-only (IO) strips it uses to hedge its mortgage portfolio. In addition to the SEC investigation, Doral has been served a grand jury subpoena from the US Attorney's Office for the Southern District of New York...
Further details in the full article.

-- MDT
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Internet Archive Launces Open Source Library Project
While having worked on the project for several years, the Internet Archive recently announced it's Open Libarary project with the goal of offering freely accessible content from hundreds of thousands of digitized books. The project has an array of impressive partners but one is notable in its absence - Google, which has been pursing it's own digitization project:
An open-source rival to Google's book project

By Stefanie Olsen
October 25, 2005
ZDNet.com

...The Internet Archive only plans to scan books that are in the public domain and those that copyright holders have given the green light for scanning.

Though it has been working on the effort for years, the Internet Archive recently jump-started its effort by introducing the Open Content Alliance. Members include Adobe Systems, Columbia University, the European Archive, the Biodiversity Heritage Library and Smithsonian Institution Libraries.

Yahoo and MSN Search are also notable members, given their investments in Web search and driving traffic to their proprietary services. The two companies boasted the openness of the project Tuesday night, but their allegiance to the open-source project surely is a strategic counterbalance to Google's project. In the end, the open-source library will also be searchable using MSN Search and Yahoo.

Their support means donating money. MSN Search, for example, has committed approximately $5 million to ensure 150,000 books are scanned and added to the collection over the next year.

Last week, the Internet Archive launched Open Library, a Web site that will eventually house all the world's books, according to the nonprofit. It now demonstrates the project with 15 digitized works. The Web site's interface is modeled after that of the British Library in the United Kingdom.

The foundation will digitize 18,000 works of fiction chosen from the University of California archive project that are no longer bound by copyright....
The full article, with further details about the project and its non-rivalry with Google's similar venture, check out the full article.

-- MDT
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10/26/2005
Still Wondering Exactly What Happened Inside Refco?
Tom Kirkindall from of Houston's Clear Thinkers has taken the time to explain it to himself and given us the benefit of listening in via his fine blog. So here goes:
Despite the superficial allure of criminal charges against crafty businessmen, I remain skeptical of criminal cases against anyone until I truly understand them, and the post-Enron era of the government playing to the public's resentment of wealthy business executives has only reinfored my skepticism. So, I continue to look for a coherent explanation of the details behind the government's above-described theory of the case against Mr. Bennett...so let's break this down:
RGHI owes money to Refco;

Refco makes loan 1 to the hedge fund;

Then, hedge fund makes loan 2 to RGHI;

Refco then makes loan 3 to RGHI;

RGHI uses the proceeds from loan 3 to pay the hedge fund for loan 2; and

Then the hedge fund uses the proceeds from the loan 2 repayment to repay loan 1 to Refco.
And indictments ensue... Did'ja get all that? Neither did Tom, who apparently remains a bit skeptical on exactly where the fraud lies. Check out his full post for a bit of a different perspective on the Refco mess.

And while you're there mourn for his struggling 'Stros who don't quite look like they're going to cut the mustard in this year's World Series.

-- MDT

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Vioxx Plaintiff Attorneys Pushing For Cases to Be Heard in State Courts
Via the WashingtonPost.com:
Lawyers Herd Vioxx Cases Into State Courts

By LINDA A. JOHNSON
The Associated Press
Monday, October 24, 2005; 7:46 PM

TRENTON, N.J. -- Lawyers for plaintiffs in the massive litigation over withdrawn painkiller Vioxx are banding together a legal "dream team" that plans to push all their future lawsuits into state courts, considered less friendly to defendant Merck & Co.

Houston lawyer Mark Lanier and New York attorney Perry Weitz have assembled a legal team of at least 10 law firms and 350 lawyers, Lanier told The Associated Press Monday. In addition to pushing the lawsuits to state courts, the effort is aimed at forcing Merck to start "trying to resolve cases fairly" with settlements instead of fighting each in court, Lanier said.

"We've got the best courtroom lawyers, we've got the best mass tort lawyers ... and we've got the best negotiators that America has to offer working together on a dream team that is Merck's biggest nightmare," he said. "We call it kind of the 'Legal Godfathers.'"

Meanwhile in Atlantic City, where Merck is wrapping up its defense in the second Vioxx product liability trial, the company suffered a setback Monday when the judge turned down its request to let jurors see a U.S. Food and Drug Administration document the company considers crucial to its case.

During a conference call with analysts at which Merck discussed its third-quarter earnings report, general counsel Kenneth Frazier said the company was sure its strategy of fighting every lawsuit remains correct.

"We expect to oppose any attempt to splinter, to disrupt the operation of the MDL," Frazier told the analysts, referring to multidistrict litigation in federal court. In the MDL, pretrial evidence-gathering for thousands of Vioxx suits is consolidated to save time and prevent Merck officials from having to give repeated depositions.

Merck outside counsel Ted Mayer said the company also prefers keeping cases in the MDL because that gives Merck consistent rulings on standards for admitting evidence and for expert testimony. He added that Merck has plenty of legal teams to handle simultaneous trials.

For plaintiffs, evidence rules in state courts generally allow more leeway. Lanier said Merck expected to fight most Vioxx cases in federal courts in the MDL, but he expects to have 10 legal teams running state trials nearly continuously, tying up Merck resources. Lanier said his lawyers' group already has about 18,000 potential lawsuits awaiting filing.

The lawyers will share depositions, documents and legal strategies, according to Lanier, who in August won a $253.4 million verdict for the widow of a Texas Vioxx user in the first Vioxx trial. That will be reduced to about $26 million because Texas caps punitive damages. Merck shares rose 82 cents, or 3.1 percent, to $27 in trading on the New York Stock Exchange.

Whitehouse Station-based Merck withdrew Vioxx from the market in September 2004 after research showed a doubled risk of heart attack and stroke for people using the drug for at least 18 months. The company already faces roughly 7,000 Vioxx product liability suits.

"I would be surprised if Merck would just cave (and settle cases) simply based on having to have lawyers run in a lot of different directions," said Deborah Barnard, a Boston lawyer specializing in product liability cases.

New York attorney Michael London, who is handling more than 100 Vioxx lawsuits but is not on Lanier's team, said Lanier's strategy is a good one because it makes things less predictable for Merck.

With nearly all the lawsuits so far filed either in New Jersey or federal court and just two judges overseeing those cases now, London said Merck can expect consistent rulings and know when its next cases will be scheduled for trial.

"Who knows what some 30, 40 state court judges might do?" London said, with trial schedules and evidence rulings. By law, cases filed in Merck's home state of New Jersey cannot be moved to federal court. Merck can automatically move to federal court any cases filed in other state courts and the small number of class-action cases filed so far.

If a state court plaintiff also names a second defendant, such as a doctor or pharmacy, in that plaintiff's home state, usually the case cannot be moved to federal court. However, Mayer said Merck has persuaded state judges in "a fairly large number" of such cases to transfer them to federal court, arguing the second defendant is not a bona fide target.

In the Atlantic City trial, Superior Court Judge Carol Higbee, who had blocked Merck's move to put the FDA memo in evidence before the trial started, rejected it again Monday after hearing from an expert cardiologist hired by Merck who called it "scientifically reliable."

The 19-page memo, issued last April, said other anti-inflammatory drugs also carry a risk of heart attack, stroke and death. Higbee, who said she read the memo 10 times before she understood what it was saying, said giving it to jurors would confuse them but not shed any light on the questions they will have to decide, in part because it was issued long after the 2001 heart attack suffered by plaintiff Frederick "Mike" Humeston.

"We do think it's relevant information the jury should be allowed to hear," Merck spokesman Jim Fitzpatrick said after the ruling. Merck has acknowledged links between Vioxx users and heart attacks after 18 months' use but contends Humeston was stricken for other reasons.
The original article appears here.

-- MDT

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New York Sun Welcomes Lerach Back to NYC
Lerach Coughlin, the law firm headed by illustrious plaintiffs' attorney, Bill Lerach, former partner in Milberg Weiss and pater familias of the multi-billion dollar Enron class action settlements is getting some new digs in New York's TriBeCa neighborhood.

The New York Sun has details (subscription required for full article).

-- MDT

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10/25/2005
419 Scammers 'Go Chop Your Dollar
Taking a break from Refco-centrism at The Daily Caveat, here's an amusing and disturbing story for you, dear readers. We've written in the past about the pervassive nature of 419 scams and the various lengths that international regulators and individual vigilantes have gone to in attempting to curtail these would-be con artists.

Well, the scammer-gauntlet has just been thrown down, with the release I Go Chop You Dollars by , which has become a hit single in Lagos, as well as a theme song of sorts for the friendly neighborhood 419 perpetrator:
Their anthem, I Go Chop Your Dollar, hugely popular in Lagos, hit the airwaves a few months ago as a CD penned by an artist called Osofia:
419 is just a game, you are the losers, we are the winners. White people are greedy, I can say they are greedy. White men, I will eat your dollars, will take your money and disappear. 419 is just a game, we are the masters, you are the losers.
According to one successful scammer, Samuel, interviewed by the LA Times,
"...[E]-mail scammers prefer hitting Americans, whom they see as rich and easy to fool. They rationalize the crime by telling themselves there are no real victims: maghas are avaricious and complicit. To them, the scams, called 419 after the Nigerian statute against fraud, are a game. "Nobody feels sorry for the victims," Samuel said. Scammers, he says, "have the belief that white men are stupid and greedy. They say the American guy has a good life. There's this belief that for every dollar they lose, the American government will pay them back in some way."
If only...

And lest you think this all be a joke, you can check out the video - of course there's a video - right here (video will load as a MOV file). The full lyrics are here.



Oh yes, and here's the album cover...

-- MDT

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Near Billion Dollar Refco Sell-Off Not Settled Yet
Late last week it appeared that an investment group fronted by former Goldman Sachs partner, Christopher Flowers was first in line to purchase and salvage scandale-plagued futures brokerage, Refco from it's sudden, scandalous flat-spin into bankruptcy. But Flowers' group appears to have some stiff competition and according to the New York Times the "race" for Refco is far from over.
Race for Refco unit: One out, more in

October 25, 2005
By Jenny Anderson
The New York Times

A group of investors led by J. Christopher Flowers, a former Goldman Sachs partner, has withdrawn its bid for the futures brokerage business of Refco after a bankruptcy judge ruled that he would approve a sale only with a significantly lower breakup fee and a smaller reimbursement of fees. Flowers's action came on Monday as other bidders emerged for the Refco unit, which Flowers had sought to acquire for $768 million. Interactive Brokers Group, a broker-dealer based in Greenwich, Connecticut, offered $857.9 million, and a consortium led by Dubai's government bid $828 million.

A group that includes Merrill Lynch, Warburg Pincus and Susquehanna International Group said it would be interested in the unit and would buy it without a break-up fee but did not indicate a price. Other parties, including Apollo Management, Man Group and Marathon Asset Management, also expressed interest in the regulated entity.

The day was a significant blow to Flowers, who had emerged last week as a white knight to save the Refco unit, the largest independent futures brokerage business. A prominent name in private equity, Flowers started to negotiate with bankers and lawyers to buy the business on Oct. 14, a lawyer for Flowers's firm said. On Oct. 17, the firm, J.C. Flowers & Co., made an initial proposal to buy the regulated futures business for 103 percent of its regulatory capital, which is the amount of money that must be held by firms that deal in customer accounts.

At that time, Goldman Sachs was advising Refco on the sale, free of charge, and the Chicago Mercantile Exchange, which regulates Refco, said it would have to take emergency regulatory action by Oct. 17 if a deal were not signed.

Flowers signed the memorandum of understanding after doing only cursory due diligence, taking a risk that others might or might not have been willing to take. Greenhill & Co. signed on as advisers on Oct. 14, and the following Monday, Goldman stepped out of the deal. The parent company of Refco filed for bankruptcy-court protection later that day, leaving its regulated futures business to be auctioned as an asset.

By making the first bid, Flowers gained "stalking horse" status, meaning that he was the first bidder and that any that followed would have to make certain concessions. For that, Refco awarded Flowers's group a breakup fee of 2.8 percent of the price of the deal, or $21.5 million, and a provision to receive $5 million to $7 million in reimbursed fees. That deal was subject to the approval of the bankruptcy court, which lowered that fee to $5 million plus $1 million for expenses.

In bankruptcy court on Monday, other bidders criticized the preferential treatment that Flowers appeared to receive, contending that they had been denied access to documents and information about the Refco business. Customer assets at the business have fallen to about $3.4 billion from $7.5 billion.

"Access was not provided by the investment banks," said Jonathan Landers, a lawyer representing an investment group that includes Dubai's government and Yucaipa, an investment firm run by Ronald Burkle. "The only way we got in was through the independent directors" of Refco on Sunday, he said.

Michael Reilly, a lawyer from Bingham McCutchen representing Marathon Asset Management, a hedge fund, agreed: "There were many bidders ready that weekend; they just couldn't get in."

Early on Monday, Judge Robert Drain of the federal bankruptcy court in Manhattan questioned why potential bidders had not been given access to documents about the business and why an expedited schedule was necessary, since the value of the asset seemed to be rising, not falling. He asked that Skadden, Arps, Slate, Meagher & Flom, the law firm representing Refco, and Flowers agree to revise the submitted bankruptcy procedures.

During a lunch break, J. Gregory Milmoe, the Skadden Arps lawyer representing Refco, met with the Flowers group to revise its bid. He then met with 40 to 50 potential bidders to hear their concerns about the bankruptcy procedures. When he returned to court in the afternoon, Milmoe indicated that Flowers's group would lower its breakup fee to $15 million, its expense reimbursement to $5 million instead of a potential $7 million and a provision that requires bidders to exceed his offer by $10 million, to $1 million.

In addition, the revised document specified that all potential bidders would be given equal access to all documents. Even with those revised terms, lawyers protested the break-up fee in court, arguing that there was clearly a higher offer on the table from Interactive Brokers. That bid carries no break-up fee and no reimbursement.


NEW YORK A group of investors led by J. Christopher Flowers, a former Goldman Sachs partner, has withdrawn its bid for the futures brokerage business of Refco after a bankruptcy judge ruled that he would approve a sale only with a significantly lower breakup fee and a smaller reimbursement of fees.

Flowers's action came on Monday as other bidders emerged for the Refco unit, which Flowers had sought to acquire for $768 million. Interactive Brokers Group, a broker-dealer based in Greenwich, Connecticut, offered $857.9 million, and a consortium led by Dubai's government bid $828 million.

A group that includes Merrill Lynch, Warburg Pincus and Susquehanna International Group said it would be interested in the unit and would buy it without a break-up fee but did not indicate a price. Other parties, including Apollo Management, Man Group and Marathon Asset Management, also expressed interest in the regulated entity.

The day was a significant blow to Flowers, who had emerged last week as a white knight to save the Refco unit, the largest independent futures brokerage business. A prominent name in private equity, Flowers started to negotiate with bankers and lawyers to buy the business on Oct. 14, a lawyer for Flowers's firm said. On Oct. 17, the firm, J.C. Flowers & Co., made an initial proposal to buy the regulated futures business for 103 percent of its regulatory capital, which is the amount of money that must be held by firms that deal in customer accounts.

At that time, Goldman Sachs was advising Refco on the sale, free of charge, and the Chicago Mercantile Exchange, which regulates Refco, said it would have to take emergency regulatory action by Oct. 17 if a deal were not signed.

Flowers signed the memorandum of understanding after doing only cursory due diligence, taking a risk that others might or might not have been willing to take. Greenhill & Co. signed on as advisers on Oct. 14, and the following Monday, Goldman stepped out of the deal. The parent company of Refco filed for bankruptcy-court protection later that day, leaving its regulated futures business to be auctioned as an asset.

By making the first bid, Flowers gained "stalking horse" status, meaning that he was the first bidder and that any that followed would have to make certain concessions. For that, Refco awarded Flowers's group a breakup fee of 2.8 percent of the price of the deal, or $21.5 million, and a provision to receive $5 million to $7 million in reimbursed fees. That deal was subject to the approval of the bankruptcy court, which lowered that fee to $5 million plus $1 million for expenses.

In bankruptcy court on Monday, other bidders criticized the preferential treatment that Flowers appeared to receive, contending that they had been denied access to documents and information about the Refco business. Customer assets at the business have fallen to about $3.4 billion from $7.5 billion.

"Access was not provided by the investment banks," said Jonathan Landers, a lawyer representing an investment group that includes Dubai's government and Yucaipa, an investment firm run by Ronald Burkle. "The only way we got in was through the independent directors" of Refco on Sunday, he said.

Michael Reilly, a lawyer from Bingham McCutchen representing Marathon Asset Management, a hedge fund, agreed: "There were many bidders ready that weekend; they just couldn't get in."

Early on Monday, Judge Robert Drain of the federal bankruptcy court in Manhattan questioned why potential bidders had not been given access to documents about the business and why an expedited schedule was necessary, since the value of the asset seemed to be rising, not falling. He asked that Skadden, Arps, Slate, Meagher & Flom, the law firm representing Refco, and Flowers agree to revise the submitted bankruptcy procedures.

During a lunch break, J. Gregory Milmoe, the Skadden Arps lawyer representing Refco, met with the Flowers group to revise its bid. He then met with 40 to 50 potential bidders to hear their concerns about the bankruptcy procedures. When he returned to court in the afternoon, Milmoe indicated that Flowers's group would lower its breakup fee to $15 million, its expense reimbursement to $5 million instead of a potential $7 million and a provision that requires bidders to exceed his offer by $10 million, to $1 million.

In addition, the revised document specified that all potential bidders would be given equal access to all documents. Even with those revised terms, lawyers protested the break-up fee in court, arguing that there was clearly a higher offer on the table from Interactive Brokers. That bid carries no break-up fee and no reimbursement.
The original article appears here courtesy of the International Herald Tribune.

-- MDT

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Liberty Corner Claims Innocence, Is Promptly Sued, Sues Refco
As the actions of former Refco CEO Phillip Bennett broke a few weeks ago, almost immediately a New Jersey-based hedge fund, Liberty Corner Capital Strategies became implicated because of the firm's role knowingly or unknowingly helping Bennett obscure almost half a billion in bad debts.

For the Record, Liberty wants the investing public to know that they are not a target in the Refco probe. That hasn't stopped them from being sued by Refco shareholders, however, who are understandably unwilling to take anybody's word about anything at this point. Meanwhile, because the scales of life and litigation must balance, Liberty has announced it's intent to sue Refco.

Fearful symmetry.

-- MDT

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First Bancorp Takes Hit on Announcement of SEC Investigation
Via Forbes.com:
First Bancorp Shares Slide on SEC Order

October 24, 2005
Associated Press

Shares of First BanCorp slumped to new 52-week low Monday, following news the Securities and Exchange Commission issued a formal order of investigation into the Puerto Rican bank.

Shares of First Bancorp (P.R.) were down $1.13, to $14.12, on volume of 1.1 million shares, compared with average daily volume of about 678,300. Earlier, shares changed hands as low as $13.55, below the previous year low of $13.80, reached earlier this month when the company announced both its chief executive and chief financial officer stepped down amid the accounting investigation.

Late Friday, First BanCorp said the SEC had issued the order, which stems from an informal inquiry started in August. The company - which operates about 40 branches in Puerto Rico and a dozen in the U.S. and British Virgin Islands - said the investigation "appears to relate to, among other things, transactions in which First Bank acquired a substantial number of mortgage loans from other Puerto Rican financial institutions."

The bank's own audit committee has been looking into the transactions, and the proper accounting treatment of them, since learning about the SEC's interest, the company said in a release. One question is whether the mortgage transactions were properly classified in financial statements. Although the review is not complete, First BanCorp said it has found transactions with R&G Financial Corp. that were accounted for incorrectly, and may need to restate its previously issued financial statements for 2000 through the first quarter of 2005.

First Bancorp said it will continue to comb through its books to examine transactions with other Puerto Rican financial institutions, including Doral Financial Corp., Puerto Rico's largest home mortgage lender. Doral shares also fell, and were down 19 cents, to $11.69, in afternoon trading on the New York Stock Exchange.
The original article appears here.

-- MDT
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10/24/2005
GAO "Scandalized" Over SEC Finances
Via the Seattle Post Intelligencer:
GAO: Weak financial management plagues SEC

THE ASSOCIATED PRESS
October 21, 2005

WASHINGTON -- The Securities and Exchange Commission has been plagued by weak financial management that caused budget overruns of nearly $50 million in two years, congressional auditors said in a report released Friday.

The report by Congress' Government Accountability Office found "ineffective management controls" at the SEC, the agency that enforces rules mandating strong internal controls for public companies. The report amplified a GAO study issued in May that cited weaknesses in the agency's preparation of financial statements and the security of its information.

In their budget planning for the two fiscal years ending next Oct. 1, SEC officials underestimated by $48.7 million the costs of building the agency's new Washington headquarters and upgrading its regional offices in New York City and Boston, the new GAO report found. As a result, the agency - whose budget was nearly doubled by the anti-fraud law enacted in 2002 at the height of the corporate scandals - had to freeze hiring and cut back on staff travel.

The SEC's overall budget for fiscal 2006 is $888 million, unchanged from the year before. Among other things, the GAO said, managers of the building projects were "not held accountable for providing accurate and complete (cost) estimates." "Personnel problems and staff vacancies were not addressed" in a timely manner, it said.

The problems were said to have occurred toward the end of former SEC chairman William Donaldson's tenure. The current chairman, Christopher Cox, who left Congress to assume the job in August, said in a letter to the GAO investigators that he has "devoted significant staff resources to completing these (building) projects in a timely manner and funding them appropriately."

"I am determined to put these budgeting errors and omissions behind us," Cox wrote in the Oct. 7 letter. He cited changes made to the projects to reduce their costs and an anticipated $4 million cost saving in connection with the Boston office. In its report, the GAO noted Cox's commitment to resolve the budget and management issues.

Another GAO report released this month found that since 2002, defrauded investors have received only about 1 percent of the billions of dollars collected for them by the SEC. The agency has taken in more than $4.8 billion in civil fines and restitution in settlements with companies and individuals during that period but has distributed to the entitled shareholders only about $60 million from three of the 75 cases in question, the report said.
The original article appears here and October 21 GAO SEC budget analysis report can be found here. The May GAO audit report cited in the article can be found here.

-- MDT

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Refco Insiders Pocketed $1 Billion - In retrospect, Shareholders Not Amused
Via The Business:
Angry creditors chase missing $1bn given to Refco insiders

Joe Lauria - in New York
October 23, 2005
The Business

THE scandal surrounding Refco, the world’s largest publicly-traded hedge fund, continued to mushroom last week after it was revealed that company insiders pocketed more than $1bn (£560m, E830m) from the firm in the year before declaring what was the fourth largest bankruptcy in US history.

As the multi-pronged government probe widened, competition to buy Refco assets not under bankruptcy protection also intensified. The value of these assets has plunged 45% from $7.5bn to $4.1bn since the scandal erupted.

Hours after declaring bankruptcy last Sunday, Refco signed a tentative agreement to sell its regulated futures brokerage unit to a group of investors led by J. Christopher Flowers, a former Goldman Sachs executive. But on Thursday Interactive Brokers Group, America’s largest independent broker-dealer, topped Flowers with an offer of $768m for the futures unit.

Dubai Investments, the Middle East state’s investment arm, is pushing to buy the entire bankrupt company for $1bn. Calyon Financial, a Refco rival, is also joining the fray. Within days of refco’s bankruptcy dozens of investors, creditors and their attorneys flew to New York to stake their claims in bankruptcy court.

More than 40% of Refco clients have pulled their money out of its regulated futures-trading unit. Refco went public only last August in an initial public offering managed by Goldman Sachs. Refco had been in business for decades before going public, trading foreign currency, US treasuries and commodities, last year for 200,000 clients. Many will now almost certainly take legal action against the company.

It emerged that when Robert Trosten left his post as chief financial officer a year ago he received $45m, according to testimony earlier this year at an arbitration hearing.

Former chairman Phillip Bennett appears to have received $700m from proceeds the company gained from sale of assets to Thomas Lee Partners last year. British-born Bennett was arrested and charged with securities fraud by federal authorities on 12 October. He faces up to 20 years in jail and is being held on $50m bail. Bennett is accused of hiding $430m in debt.

The next day, Refco temporarily shut down Refco Capital Markets, an important unit, because liquidity dried up. Trading was stopped on the New York Stock Exchange at $7.90 a share and Refco’s bonds plunged.

Last Monday, Refco agreed to sell its regulated futures brokerage business to Flowers for $770m in cash or an option to retain a 20% in the company.

On Tuesday, Hubert Gorbach, Austria’s vice-chancellor, asked the central bank to open an investigation into Bawag, an Austrian bank with ties to Bennett. Bawag is listed as Refco’s top creditor in the bankruptcy filing, claiming $451.2m.

Bawag said on Thursday it tried to stop a E350m loan payment to Bennett on 10 October after seeing reports about Refco. But it was too late. Bennett used the Bawag loan to repay some of the debt he owed Refco. He offered Bawag his 34% stake in the company as collateral.
The original article appears here.

-- MDT

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10/20/2005
More on Grant Thornton's Potential Liability from the Refco Debacle
Via The Independent:
Grant Thornton facing huge claims over Refco collapse

By Katherine Griffiths in New York
October 19, 2005
The Independent

Grant Thornton, the international accountancy firm which audited the scandal-ridden futures trader Refco, defended its reputation yesterday in the face of possible multimillion-dollar claims from investors hit by the dramatic collapse of the firm.

Edward Nusbaum, the chief executive of Grant Thornton, admitted that the company would be sued for its involvement in signing off Refco's accounts when it floated on the New York Stock Exchange in August. But he insisted the firm had been misled, just as Refco shareholders had been, by the company's former management.

Refco filed for bankruptcy for two parts of its business yesterday and tentatively agreed to a fire sale of a third part, which trades financial futures, to a consortium led by the private investment group JC Flowers for $768m (£439m). JC Flowers, which is run by Christopher Flowers, a former Goldman Sachs banker, must get the deal approved by a Manhattan bankruptcy court.

The move marks an extraordinarily swift demise for Refco, which revealed last Monday that its chief executive and chairman, Phillip Bennett, was departing after the brokerage found he had covered up millions of dollars of bad debts. Mr Bennett was arrested the following day on criminal charges that he misled investors about the true state of Refco's finances at the time of its flotation.

Grant Thornton took over as Refco's auditor from the defunct accounting giant Arthur Andersen. The firm, as well as Refco's banking underwriters Goldman Sachs, Credit Suisse First Boston and Banc of America Securities, are likely to be the focus of lawsuits brought by shareholders whose investments may be entirely wiped out by the revelations of alleged fraud.

Mr Nusbaum said: "If we had known about the situation before, we would have conducted an investigation and made the implications [known] as it related to the financial statements. Everything we have seen so far indicates we complied with professional standards. Certainly we will be sued. There will be significant legal costs. We believe the cost will be absorbed by the firm."

Lawsuits are being prepared against various parties involved with Refco by heavyweight law firms such as Milberg Weiss and Lerach Coughlin.

In its defence, Grant Thornton will be able to say that it reported two serious deficiencies in Refco's internal financial controls, which were included in the company's IPO prospectus. The auditor noted at the time that there was a shortage of people to prepare Refco's financial statements and a lack of formalised procedures for closing the company's books.

Refco is the latest corporate scandal to engulf Grant Thornton. The Chicago-based firm was also the auditor of Parmalat, which collapsed after an accounting fraud. In the Refco case, the role of Goldman is also being scrutinised because of the number of relationships it has to parties involved in the rapidly evolving situation. As well as being an underwriter in the float, Goldman was hired last week to offer crisis management advice to Refco. Mr Flowers, who emerged as a buyer for Refco's futures arm over the weekend, was a partner at the bank. He has hired Matt Winkelman, formerly joint head of Goldman Sachs fixed-income division, as the new chairman of the futures business.

Mr Flowers said: "I left Goldman Sachs a long time ago and no longer have any association with it." He added that his consortium has an option to buy the rest of Refco. A possible deal will depend on how the Manhattan bankruptcy court divides the company's assets among creditors and investors.

Grant Thornton, the international accountancy firm which audited the scandal-ridden futures trader Refco, defended its reputation yesterday in the face of possible multimillion-dollar claims from investors hit by the dramatic collapse of the firm.

Edward Nusbaum, the chief executive of Grant Thornton, admitted that the company would be sued for its involvement in signing off Refco's accounts when it floated on the New York Stock Exchange in August. But he insisted the firm had been misled, just as Refco shareholders had been, by the company's former management.

Refco filed for bankruptcy for two parts of its business yesterday and tentatively agreed to a fire sale of a third part, which trades financial futures, to a consortium led by the private investment group JC Flowers for $768m (£439m). JC Flowers, which is run by Christopher Flowers, a former Goldman Sachs banker, must get the deal approved by a Manhattan bankruptcy court.

The move marks an extraordinarily swift demise for Refco, which revealed last Monday that its chief executive and chairman, Phillip Bennett, was departing after the brokerage found he had covered up millions of dollars of bad debts. Mr Bennett was arrested the following day on criminal charges that he misled investors about the true state of Refco's finances at the time of its flotation.

Grant Thornton took over as Refco's auditor from the defunct accounting giant Arthur Andersen. The firm, as well as Refco's banking underwriters Goldman Sachs, Credit Suisse First Boston and Banc of America Securities, are likely to be the focus of lawsuits brought by shareholders whose investments may be entirely wiped out by the revelations of alleged fraud.

Mr Nusbaum said: "If we had known about the situation before, we would have conducted an investigation and made the implications [known] as it related to the financial statements. Everything we have seen so far indicates we complied with professional standards. Certainly we will be sued. There will be significant legal costs. We believe the cost will be absorbed by the firm."

Lawsuits are being prepared against various parties involved with Refco by heavyweight law firms such as Milberg Weiss and Lerach Coughlin.

In its defence, Grant Thornton will be able to say that it reported two serious deficiencies in Refco's internal financial controls, which were included in the company's IPO prospectus. The auditor noted at the time that there was a shortage of people to prepare Refco's financial statements and a lack of formalised procedures for closing the company's books.

Refco is the latest corporate scandal to engulf Grant Thornton. The Chicago-based firm was also the auditor of Parmalat, which collapsed after an accounting fraud. In the Refco case, the role of Goldman is also being scrutinised because of the number of relationships it has to parties involved in the rapidly evolving situation. As well as being an underwriter in the float, Goldman was hired last week to offer crisis management advice to Refco. Mr Flowers, who emerged as a buyer for Refco's futures arm over the weekend, was a partner at the bank. He has hired Matt Winkelman, formerly joint head of Goldman Sachs fixed-income division, as the new chairman of the futures business.

Mr Flowers said: "I left Goldman Sachs a long time ago and no longer have any association with it." He added that his consortium has an option to buy the rest of Refco. A possible deal will depend on how the Manhattan bankruptcy court divides the company's assets among creditors and investors.
The original article appears here.

-- MDT

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NASD Finse Greenstreet for Unregistered Analysts
Via Reuters:
NASD fines Green Street for unregistered analysts

October 19, 2005
Reuters

WASHINGTON - Green Street Advisors, a Los Angeles-based broker-dealer, has been fined $150,000 for failing to register its eight research analysts under new requirements, and allowing them to continue publishing research reports, market regulator NASD said on Wednesday.

The new NASD registration rules took effect last year and established a special examination series and registration classification for analysts. They were created following a series of enforcement actions related to research analysts' conflicts of interest. A spokesman for Green Street could not immediately be reached for comment. The firm neither admitted nor denied the charges.

"It is particularly disturbing that this firm was aware of the problem, failed to observe the new rules' deadlines, and yet continued to issue reports without properly registering their analysts," said Barry Goldsmith, NASD head of enforcement, in a statement...

More details in the original article.

-- MDT

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Reuters Picks Up Kroll / South African Controversy
But if you are a regular at The Daily Caveat, you read about it in this space more than a week ago. Here's what Reuters had to say:
S. Africa's police, spies squabble over elite unit

October 19, 2005

By John Chiahemen
Reuters

JOHANNESBURG (Reuters) - South Africa's police and spy agencies are locked in a damaging power struggle that could undercut efforts to improve security in one of the most crime-ridden countries in the world. A row over which government department should control the FBI-style Scorpions investigation unit has openly split President Thabo Mbeki's cabinet and brought into the open wrangling among heads of his intelligence agencies.

A special commission ended public hearings last week and will advise Mbeki whether the Scorpions should fall under police control, as their critics demand, or retain their elite status in the Justice Ministry's National Prosecuting Authority (NPA). Many analysts worry that bringing the Scorpions under the police -- whose poorly paid and poorly trained members are barely managing to cope with one of the highest crime rates in the world -- could further undermine the fight against crime.

"The Scorpions were set up to do their own part of crime fighting, and they do a good job -- better than some expected, perhaps," said political analyst Herman Van der Linde. In a submission to the commission, Mbeki's spy chief, Billy Masetlha, accused the Scorpions unit of compromising national security "because it relies on and interacts with foreign intelligence agencies".

According to a leaked version of the submission, he also said the unit's outsourcing of forensic work to foreign companies like Kroll International meant vital information could pass into the hands of foreign agencies. Masetlha was backed at the commission by national police chief Jackie Selebi and, surprisingly, by Justice Minister Bridgette Mabandla, whose ministry now oversees the Scorpions.

Opposing them were Intelligence Minister Ronnie Kasrils and Vusi Pikoli, head of the NPA and its Scorpions unit, whose official name is the Directorate of Special Operations (DSO). Mbeki and his cabinet have denounced Masetlha's submission in which he named Scorpion agents he said were cooperating with the U.S. Central Intelligence Agency and Britain's MI5.

In a statement, the cabinet said it wanted to "distance government from statements ... which seek to question the integrity of officials employed in the DSO and to cast aspersions on cooperation that our institutions have with their international counterparts". Government spokesman Joel Netshitenzhe told Reuters the submission "does not reflect our policy of cooperating with international agencies on issues like fighting terrorism".

TURF WARS

Masetlha, who until last year headed Mbeki's presidential intelligence unit, is director-general of the country's domestic intelligence network, the National Intelligence Agency (NIA). The NIA has become increasingly alarmed by the growing involvement of the Scorpions in external intelligence, notably their hunt abroad for South Africans suspected of working in the black market for nuclear components, security sources say.

But political analysts said underlying the row was Mbeki's contentious sacking of his popular deputy, Jacob Zuma, who was investigated by the Scorpions and charged with corruption in a case that has split the ruling African National Congress (ANC). As a former operative in the ANC's exiled armed wing during the fight against apartheid, Masetlha would have worked under Zuma, who was head of the ANC's military intelligence unit. Many NIA officials were in the same unit.

Critics say Mbeki has turned the Scorpions into an instrument for political vendetta. Zuma says the graft charges following the conviction of his former financial adviser were trumped up to prevent him succeeding Mbeki in 2009.

The original article appears here.

-- MDT

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10/19/2005
Serono Labs Pleads Guilty in Whistleblower Case, to Pay Largest Fine on Record for Medicaid Fraud
Via Mark Whalstrom's excellent Settlement Channel blog:
...Serono Laboratories, Inc. pled guilty today to two counts of conspiracy and agreed to pay $704 million dollars to settle one of the largest health care fraud cases in US history...

The fine paid is the single largest Medicaid fraud case on record and was related to an ongoing fraud perpetrated by 5 former sales representatives who offered kickbacks to doctors for prescribing Serostim, a patented AIDs related medication. The fraud ran from 1996 to the present and the award represents the gross profits of the company in selling the drug over that time to Medicaid recipients.

The scam came to light after 5 employees of the company filed suits claiming violations of the false claims laws, and they will share a $75 million allocation as part of their whistle blower action.

Click on over and check out Mark's full post replete with links to supporting articles. While yout there, take some time to review his excellent coverage of the recent maneuvers relating to the ongoing Vioxx litigation.

-- MDT

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New India-Based Fund of Funds Launches
Via Business Standard:
Dalmia group, Dubai firm float fund of funds

Nesil Staney
Mumbai
October 19, 2005

The Dalmia Group and Evolvence Capital of Dubai have raised a fund of funds which would invest in private equity and venture capital funds in India. The fund of funds, has allocated about $10-30 million for investments in private equity, infrastructure and real estate funds, and has already committed capital to four private equity funds: GW Capital, Barings, IDFC and IL&FS. Many institutional and high net worth investors in the Middle East, including prominent business families are said to have invested in the fund.

“The oil-rich investors in the Middle-East are pure equity investors, unlike others who make equities a part of their portfolio. Now that they have turned their focus from the western markets to Asia, they would definitely be the major players in Indian market in future,” says Gaurav Dalmia, director of the Dalmia Group. Private equity funds have done well in the in the last four years and has given a return of about 40 per cent per annum.

The fund of funds is being run by Delhi-based, V Jegannathan and Paresh Thakker, who have worked previously with Merrill Lynch and Infinity Ventures, respectively. Evolvence Capital is a Dubai based alternative investment firm with backing from prominent families in the Gulf.

Khaled Al Muhairy, CEO of Evolvence Capital, said: “We expect Indian private equity to out-perform global benchmarks given the strong economic growth in this country. We expect good funds to return upwards of 25 per cent per annum in the coming decade. Investors like us who have a long term mindset are very bullish,” said Muhairy.

The Dalmia Group has been investing for over a decade in private equity, real estate and secondary markets, and has co-sponsored the GW Capital fund. It has interests in various industries ranging from cement, steel, IT and engineering. The group also promotes various other funds like Gujarat Ventures, Kshitij retail fund and Infinity Venture fund, an India centric Fund, which primarily invests in technology scrips.
The original article appears here.

-- MDT
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Refco Investors Hard Hit By Losses, Potential Liability

Via the Boston Globe:
Lee could face suits over role in scandal-plagued Refco's IPO

By Steven Syre
Globe Columnist
October 18, 2005

The accounting scandal at futures brokerage Refco Inc. has clobbered lots of investors, none more so than the Thomas H. Lee Co. and its private-equity clients. Here's the simple math for the Lee funds that own 38 percent of the company: Their 48.9 million Refco shares were worth $28.56 each on Oct. 7, just before news of the company's fiasco developed. Those shares last traded five days ago at $7.90. That works out to a decline of just about $1 billion.

But Lee has another Refco stock problem, one with implications that aren't so easy to pencil out. What about the $170 million of Refco stock that Lee funds sold into the market as part of the company's larger initial public offering over the summer? Refco's financial statements, included in documents supporting that IPO, are now disowned by the company itself.

That potential liability won't turn out to be anything like $170 million and does not come close to qualifying as Lee's biggest Refco headache. But it's still a big-ticket issue and poses legal questions that are extremely rare in the world of private equity.

Refco was considered one of Lee's great investing triumphs as recently as two weeks ago. The firm's funds had invested $507 million in Refco to buy a controlling interest in the business just a year ago. The shares Lee sold in the IPO, added to the increased value of the stock it continued to hold, amounted to a fast 200 percent return.

Fortunes changed quickly when Refco discovered a $430 million debt to the company was owed by an entity connected to its chief executive, Phillip Bennett, a fact that appeared to have been obscured by briefly shifting the obligation to a hedge fund client on several timely occasions.

Bennett was suspended and soon charged with securities fraud. He paid back the entire debt a week ago, but Refco warned investors they could not rely on company financial statements dating back three years. Refco shares went into a free fall as the accounting scandal unfolded.

The Refco story has been a gift to securities class-action lawyers, who are sure to press fraud and other claims against Refco and any available deep pocket. Among the likely lawsuits: claims for rescission from owners of Refco shares.

Rescission in the Refco case would require sellers of IPO shares take back the stock at a price identical to that of the initial offering, $22 per share, or nearly three times its most recent trading price.

Investors who bought their shares at the IPO or very soon after the offering -- and continue to hold them -- would have a very strong case for rescission, assuming the company financial statements backing the stock sale turn out to be fraudulent, according to attorneys who specialize in securities law and have no connection to the Refco case.

Those investors would not have to prove that Lee representatives, including four who sat on the Refco board, were aware of the fraudulent financial statements to demand that Lee funds take back the shares they sold into the IPO, the lawyers said.

Here's the catch: How many shareholders really qualify under those standards? The group of investors who bought IPO stock and still own it may be small enough to fit into a phone booth. Refco sold 26.5 million shares in its IPO. Nearly 80 million Refco shares changed hands last week alone.

Investors who have recently purchased Refco stock in the open market could sue the Lee funds as IPO sellers and seek damages. But the securities lawyers said those investors would be required to meet much higher legal standards, and their odds for success would be very remote.

Regardless of Lee's eventual exposure, no private-equity firm wants to be tied up in lawsuits challenging the honesty of an IPO in which it was directly involved. Public stock offerings are a key strategy that private-equity firms use to sell out of investments and return cash to their investors.

Despite the Refco meltdown, Lee funds have produced spectacular returns for investors. Lee funds have returned $6 billion in cash to investors over the past two years and the prime fund that put its money into Refco, Thomas H. Lee Equity Fund V, is generating annual returns over 30 percent, even if that one bad investment is written down to be considered worthless. That fund ranks among the top 10 percent of comparable private-equity portfolios.

The Refco punch hasn't decked Lee's performance. But the headlines this month and the claims in lawsuits to follow leave bruises just the same.
The original column appears here.

-- MDT

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Investigators Aledge UBS Dragging Feet In Terror Money Laundering Probe
Via the New York Sun:
Probers Irked Over Holdout By Aide at UBS

By MEGHAN CLYNE
Staff Reporter
New York Sun
October 13, 2005

Frustrating and puzzling congressional investigators, a high-ranking Treasury Department official who later assumed a top post at the world's largest "wealth management" firm, UBS, has not been made available by the Swiss bank to answer questions about whether the firm possibly laundered billions of dollars for state sponsors of terrorism, congressional staff said yesterday.

The official, David Aufhauser, served as the Treasury Department's general counsel from March 2001 to November 2003, according to a UBS press release announcing his hiring at the firm. During that time, Mr. Aufhauser supervised 1,600 lawyers in several divisions of the department, including, among others, the Financial Crimes Enforcement Network, the Office of Terrorist Financing, and the Office of Foreign Assets Control, which, among its many activities, ensures adherence to the terms of America's economic sanctions, including the Cuban embargo.

It was in violation of those sanctions that Mr. Aufhauser's current employer, UBS, procured $5 billion in American banknotes for Cuba, Iran, Libya, and Yugoslavia as part of the Extended Custodial Inventory Program, run by the Federal Reserve Bank of New York. The Federal Reserve program, in cooperation with international banks, allowed clients to exchange old banknotes for new ones. One condition of the program was that American currency neither be distributed to nor accepted from nations against which America maintains economic sanctions.

When, in April 2003, American troops liberating Iraq found $762 million in American cash in hideouts belonging to Saddam Hussein, the banknotes were traced to UBS and the ECI program. In the process of probing the origins of the Iraqi cash - which UBS has told congressional investigators was initially sent to the Central Bank of Iran - American investigators subsequently discovered that the Swiss bank had also provided $3.9 billion in American currency for Cuba, $1 billion for Iran, $30 million for Libya, and less than $1 million for Yugoslavia. Cuba, Iran, and Libya appear on the State Department's official list of state sponsors of terrorism.

As a result of an investigation by the Federal Reserve Bank of New York in cooperation with the Department of the Treasury, UBS was censured by the Swiss Banking Commission, and paid a $100 million fine to the Federal Reserve in May 2004. The next month, Mr. Aufhauser was announced as the new global general counsel for UBS's investment bank and UBS's general counsel for North America.

Mr. Aufhauser had left the Treasury Department in November 2003, according to materials distributed by UBS, seven months after the discovery of the American cash in Iraq. He worked briefly for a Washington law firm, William & Connolly LLP - where he had spent his career between 1977 and 2001 as a securities litigator before joining the Treasury Department - before being brought on by UBS in June 2004.

Prior to his departure from the Treasury Department, Mr. Aufhauser had earned a reputation as a committed foe of money laundering and terrorist financing operations...
More info on the investigation in the full article.

-- MDT

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10/18/2005
Refco Loan Documents Reviewed by Mayer, Brown, Rowe & Maw, Liberty Claims Ignorance of Wrong-doing
Or so claims an attorney for Liberty Corner Capital Strategies, the New Jersey-based hedge fund that has been aledged to have assisted Refco CEO Phillip Bennett in his efforts to obscure the futures brokerage's mounting debts. Liberty attorney Kevin Marino claims that because of Mayer, Brown, Rowe & Maw's involvement the hedge fund never questioned the legitimacy of the transactions. Mayer was also one of the law firms involved in Refco's $583 billion IPO of a few months previous.

Via Matthew Goldstein at TheStreet.com:

"Marino, interviewed Monday outside of Liberty Corner's offices in Summit, N.J., says his client was a prime brokerage customer of Refco and never had any direct dealings with Bennett. His client did not know that Refco Group was a separate company owned by Bennett. In fact, Marino says his client voluntarily called the office of U.S. Attorney Michael Garcia after seeing Liberty Corner's name mentioned in a story last Wednesday in The Wall Street Journal...

...A Mayer Brown spokeswoman, Sheila Turner, described the firm's role in the IPO as limited. Regarding the loans, Turner said Mayer Brown is still gathering information on the matter. "Based on our investigation to date, it appears that lawyers in our firm from time to time documented loans for Refco, and some of these loans appear to have been loans involving Liberty Corner Capital that have now been called into question," Turner said. "At this point in time, we are unable to provide further information..."

...Not everyone is buying Liberty Corner's version of the events. One Wall Street analyst, who didn't want to be identified, says the transaction looks suspicious on its face. Even if Liberty Corner didn't know Bennett controlled Refco Group, the movement of so much cash between two similarly named entities should have set off alarm bells. In fact, investors in the August IPO were on notice that Refco had done at least one prior transaction with Bennett's Refco Group...

For further details on the tangled Refco web, check out the full article at TheStreet.com.

-- MDT



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Refco Files for Chapter 11, J.C. Flowers to Pick Up Futures Arm
And a group of investors lead by private equity fund, J.C. Flowers & Co., LLC. is apparently picking up some of the pieces. J.C. Flowers is run by former Goldman Sachs partner, Christopher Flowers.

London's Financial times reported late yesterday that J.C. Flowers had emerged as the front-runner to purchase the futures arm of Refco, beating out bids from the Man Group and a consortium from Dubai.

Full details at Reuters.

-- MDT

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10/17/2005
Refco and The Man Group - Connecting the Dots
What do the unrelated troubles facing Refco and The Man Group have in common? They both imperil the surging hedge fund industry, threatening to bury the high-yield appeal of these alternative investment strategies under a mountain of bad press. While a private, individual investor is primarily concerned with real-money losses associated with an investment decision, an institution on the other hand is at least as concerned with potential reputational risk of being implicated in an investment-house related scandal.

Hedge funds have become somewhat more domesticated in recent years - moving from a solid base in individual wealth investors to a more diversified clientele of foundations, pension plans and institutional banks. But their increase in popularity has also increased their exposure to headline risk when something goes awry. Conal Walsh in this recent Observer article makes the point quite well and in the process, links the names and travails of our two unrelated, headline flak-catchers du jour - Refco and The Man Group:
Bennett's hidden life and frailties of Man

Conal Walsh
Sunday October 16, 2005
The Observer

Events of the past fortnight may have given rueful satisfaction to those who believe the hedge fund industry is an accident waiting to happen. America's Securities and Exchange Commission is probing claims that Man Group helped a client hide $175 million of losses. Separately, and much more seriously, Wall Street kingpin Phillip Bennett is facing fraud charges after allegedly hiding up to $540m in bad debts from investors...

...The demise of such a prominent firm would be a tremendous blow to market sentiment in itself, but others in the industry are already suffering. Refco, which acts as a middleman and counterparty on a host of transactions, has also been forced to freeze customer accounts at its capital markets unit, closing down billions of dollars' worth of deals and potentially threatening instability within the wider hedge fund market.

Even assuming a systemic crisis is averted, the affair could tarnish some august Wall Street reputations. News of the debts has taken Refco itself by surprise, and no mention of them was made when Refco floated just two months ago, raising $583m. There is a likelihood of lawsuits from aggrieved investors against Goldman Sachs, CSFB, and others who advised on the float. Investment banks that arranged Refco's bond issues could also face legal action...

Whatever the case, Bennett's alleged success in hiding the debts raises serious questions about how effectively the world of derivatives trading is being policed. Attention has been drawn to some of the potential risks highlighted in Refco's flotation prospectus, which seem all the more alarming with hindsight - they include 'our lack of formalised procedures for closing our books', and a warning that 'we could be harmed by employee ... misconduct or errors that are difficult to detect and deter'.

The hedge fund industry shrinks from any whiff of scandal - mindful, perhaps, of an epidemic of negative sentiment such as the doomsayers have long predicted. Shares in Man Group, as well as other hedge fund companies, fell last week as Bennett's entirely unconnected troubles started to mount...
Man was quick to point out that it had no financial exposure to the Refco collapse, but then, part of Walsh's point is that reputation and perception are equally important components of what constitutes exposure. And with the financial media currently tuned to the channel for hedge fund-related scandal, these are just the sort of incidents that make the whole market suffer.

There is at least one tangible connection between Refco and The Man Group, albeit only a potential one. Buried at the end of this article on Milberg Weiss's pending class action lawsuits against the various financiers and that underwrote and advised Refco's recent wall street float, is a connection of a different sort.

While no talks have taken place yet, The Man Group is apparently interested in purchasing Refco's futures business.

-- MDT

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Offshore Update & How an Investigation into the World's Largest Hedge Fund Fits into the Changing Offshore Regulatory Landscape
Check out these two great stories from Kieran Flatt at Legal Week.

The first gives a run-down of recent developments in the offshore legal envrionment in key international financial hotspots such as Bermuda, the Cayman Islands, Guernse, the Isle of Man, and Jersey.

The second concerns an ingoing investigation into the role that Man Financial, the futures brokering subsidy of The Man Group, may have played in helping the now collapsed hedge fund, Philadelphia Alternative Asset Management Co. (PAAM) obscure the existance of $175 million shortfall.

The accusations against Man arise from a U.S. Commodity Futures Trading Commission inquiry into fraud at PAAM. PAAM and it's president Paul Eustace were sued in back in June 2005 by the CFTC. The SEC is also reportedly investigating. The CTFC lawsuit aledges that:
The CFTC alleges he did this by telling investors his commodity trading pool was increasing in value when, in fact, it had lost more than $140-million from February, 2005, to May. The CFTC alleged the fraud dates back to 2001 and that Mr. Eustace enticed clients to invest in one fund that did not exist by showing them fictitious monthly trading statements. He also allegedly co-mingled client money with his own accounts.
Clarke Hodgson, the reciever appointed by the CTFC to track down PAAM assets on behalf of investors, in court documents also points blame at Man Financial for the PAAM cover-up and names Man senior vice-president Thomas Gilmartin as the executive primarily responsible:
Mr. Hodgson alleged that Mr. Gilmartin, who worked in New York, handled trades for Mr. Eustace and was a part owner of PAAM. He also alleged Mr. Gilmartin doctored some trading records in order to boost the returns of some of PAAM's funds and that he covered up huge losses. Mr. Gilmartin was recently placed on administrative leave by Man Financial. Mr. Hodgson has filed a contempt motion against Man Financial alleging the company has violated an earlier court order by withholding key documents.

“Despite the suspicious trades between accounts, the unusual transfers between accounts and the back-dating of transactions that occurred at Man Financial, Man Financial has produced no records justifying why these trades, transfers and back-dated transactions took place,” he alleged in a court filing. “The documents produced to date suggest that Man Financial had knowledge of the conduct described [by the receiver] and consented to and assisted in that conduct.”

In a statement, Man Financial said it was “surprised and disappointed” by the receiver's actions. “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. The receiver's actions are at odds with public statements he has made to the effect that he has received a ‘high degree of co-operation from most parties involved and no one has yet refused to provide documents requested,'” the company said...“We have an excellent record of regulatory engagement and compliance, and will co-operate fully with the SEC in connection with this review,” Man Group said.
Gilmartin, who was a shareholder in PAAM and their primary point of contact at Man Financial was suspended from his position in late September pending the results of the ongoing investigation.

-- MDT

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Samsung Pleads Guilty in Flash Memory Price Fixing Investigation
Late last week Samsung joined its competitors in paying hundreds of millions in fines as part of the company's guilty plea in a U.S. Justice Department investigation into price fixing in the $7.7 billion flash memory market. The Justice Department also indicated that the verdict does not shield Samsug from further prosecution and did not rule out the possibility of future criminal charges against company executives.

In other bad news for Samsung, prosecutors in Korea are tracing the bank accounts of the four children of Samsung president president Lee Kun-hee in relation to an ongoing investigation into sales of convertible bonds in Samsung Everland, a holding company asnd amusement par operator. Two Samsung executives have previously been convicted in the probe.

Prosecutors aledge that the heirs of Samsung president Lee Kun-hee recieved shares in Everland at well below market prices engendering a huge loss to the holding company. Officials are interested in determining whether Lee directed the stock transactions in an effort to circumvent inheritance taxes.

-- MDT

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10/14/2005
SCOTUS Upholds SEC Ability, Under SOX, to Freeze "Extraordinary Payments" to Execs In the Course of an Investigation
Via WebCPA.com:
High Court Upholds SEC Ability to Freeze Pay

The Supreme Court voted to let stand a ruling against two former executives of Gemstar-TV Guide International, supporting the ability of the Securities and Exchange Commission to freeze payments to executives under federal accounting fraud law.

Under the Sarbanes-Oxley Act of 2002, the SEC was granted the power to block payments to executives. Following an investigation of a $250 million accounting scandal at Gemstar, the SEC froze $37 million in termination payments to former executives Henry Yuen and Elsie Leung, who promptly challenged the law. A trial judge in the U.S. Court of Appeals for the Ninth Circuit in San Francisco ruled that the freeze was allowed, and later was overruled by a Ninth Circuit panel. The appeals court then reheard the case and overturned its original ruling.

Gemstar's businesses include the TV Guide magazine and electronics licensing. Both former chief executive Yuen and former chief financial officer Leung were forced out in late 2002 after the company was discovered to have inflated advertising sales since 1999. Yuen would have received nearly $30 million in severance. Both said that their termination fees and unpaid salaries did not meet the "extraordinary payments" requirement the law set for holding up money to corporate officers.

The SEC is moving forward to prosecute Yuen and Leung on civil fraud charges in December. Yuen has reached a plea agreement with the Justice Department, but it is under review by a federal judge. Gemstar filed objections to that agreement last week.
The original article appears here.

-- MDT

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Grant Thornton Takes Hit on Refco Fraud
Chicago accounting firm Grant Thornton is being targeted by a class action lawsuit on the grounds that, in it's role Refco's auditor and IPO underwriter, Grant Thornton failed to detect the massive financial fraud that had been perpetrated by Refco CEO Phillip Bennett and co-horts to be determined.

As this article from ChicagoBusiness.com points out, Grant Thornton was previously involved in the accounting scandal surrounding the Parmalat corporate fraud but emerged largely unbloodied from the ensuing investigations.

-- MDT

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1 Comments.
Anonymous Anonymoussaid...
When Parmelat happened, in reading the articles about it, this was noted:

http://groups.google.com/group/alt.religion.scientology/msg/e0211e3fe7234e3d?hl=en&

To those of you reading this, you won't find the words "Scientology" and "Scientologist" in this article. But there is a strong connection between the "Grant Thorton" firm of accountants and Scientology.

Digital Lightwave

http://www.digl-watch.com/documents_sec.shtml

When news of Digital Lightwave's accounting woes made it to the public, in the form of an obliquely worded earning "restatement" issued by the company on January 22, 1998, the revelations were greeted not only by the inevitable tumble in Digital's stock...In March, 2000, the SEC announced that it had launched a suit against Digital Lightwave and Bryan Zwan for "financial fraud in connection with an earning management scheme.

See http://www.digl-watch.com/index.shtml

When Auditing Meets Auditing // Oct 25 2002
In a recent filing with the Securities and Exchange Commission, Digital Lightwave announced that it has hired Grant Thornton LLP to serve as its independent accountant for the next two years. Grant Thornton, which describes itself as "the leading global firm dedicated to serving the needs of middle-market companies," has also served as auditor to the Church of Spiritual Technology, the shadowy parent church that stores away most of the millions of dollars belonging to the Church of Scientology.

"In fact, the ties between Grant Thornton and Scientology don't just end there: in 1997, a Grant Thornton LLP outpost in Houston, Texas was a member of the World Institute of Scientology enterprises, and Grant Thornton also provides auditing services to the City of Clearwater, home to not only Digital Lightwave, but also the Church of Scientology's "spiritual mecca"."
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Scandals Buoy Hedge Fund Investigative Business
KL Group...Bayou Management...Liberty Corner Advisors...Wood River...If you follow hedge funds - and really in investment today, what could be hotter than hedge funds - these are the names that keep you up at night. In order to avoid biting into the next bad apple many individual and institutional investors are turning to corporate investigators such as ourselves to vet investment opportunities.

Via Reuters:
Scandals make hedge fund sleuthing pay off -experts

October 12, 2005
By Svea Herbst-Bayliss

BOSTON - Back-to-back hedge fund scandals are sending investors a frightening message: Spend a few thousand dollars now to sidestep a multimillion-dollar fraud later. Lawyers and investigators said this week that the collapse of hedge fund Bayou Group and suspected fraud at hedge fund Wood River Partners likely will prompt investors to take more precautions before stepping into the fast-growing $1 trillion industry.

"The circle of who has gotten burned is getting bigger and the trend is that people will ask for more due diligence because they realize it pays to conduct these inquiries," said Peter Turecek, who manages the hedge fund business at Kroll, a New York-based security consulting firm. Financial regulators are sorting out what went wrong at Bayou, where investors are said to have lost $300 million, and Wood River, which once said it was managing $500 million.

Investors and lawyers have not been able to reach Wood River in the last few days, and in a lawsuit filed by Lehman Brothers against Wood River, the Wall Street investment bank said that it suspected the hedge fund ceased operating. Wood River is under investigation by the U.S. Securities and Exchange Commission.

These are the latest blowups in an industry that has attracted billions of dollars from pension funds, endowments and charities since becoming a hot asset class by delivering outsized returns in the late 1990s and positive returns during the stock market's almost three-year sojourn in bear territory.

Many investors, particularly funds of funds like Glenwood Capital Investments and Mesirow Financial that select hedge fund portfolios, already rely on investigators to snoop around and verify a manager really is who he says he is. For fees ranging between $2,000 and $50,000, firms will compile dossiers that can turn up anything from unpaid parking tickets to lawsuits to lies on resumes.

"Getting reports on managers shows that for $2,000 up front, you can avoid people like this instead of having to spend hundreds of times that amount to recoup millions of dollars in losses later," said Randy Shain, executive vice president of First Advantage CoreFacts LLC, which investigates hedge funds. "It is cheap insurance," he added.

Still, there are plenty of investors who pick managers based on a gut feeling and who consider due diligence a cost -- heaped on top of hedge funds' already hefty fees -- that is not part of their investment, lawyers and investigators said. But these are the people who might come around now, they added. "Every time there is a fraud, investors profess to do more due diligence and this is no different," said Scott Berman, a partner at law firm Friedman Kaplan Seiler & Adelman.

Those who still trust their gut may change their minds after hearing what firms like First Advantage CoreFacts turned up. This summer, a report on Wood River founder John Whittier showed the former technology analyst faced four tax liens, was sued for not paying rent and was sued for $1.6 million in securities losses, Shain said. His clients passed on Whittier. "Taken together, these three things added up to a red flag," Shain said, explaining that "the report shows Whittier ran out of money or that he's sloppy. Neither inspires confidence."

Fact checking also turned up discrepancies on Bayou founder Samuel Israel's resume when Shain's analysts tracked down the hedge fund manager's former employer, Leon Cooperman, who said he hadn't been head trader and wasn't there for four years.

As investors burned by these blowups wait to recoup money, the trend will be for people to spend a premium on "reputational reviews" that highlight behavior patterns which could become a liability later, investigators said. "People will want to know that the person is a good trader, but they'll also want to hear if the guy heads off to the bar and drinks all night every night," Kroll's Turecek said.

Looking ahead, investors also are likely to press for more clarity on operational matters like who checked the books after Bayou fabricated a firm to certify its returns. "We were able to discover that Bayou's auditor was bullshit," Shain said. This week, Reuters reported that Wood River told potential investors it had retained two firms as independent auditors. But those auditors on Tuesday denied any relationship with the controversial hedge fund.

The original article appears here.

-- MDT

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10/13/2005
Wood River - Just Another Fishy Hedge Fund
So says Business Week, recounting the sad, sorry, now-familiar tale - a promise of returns combined too-good-to-be-true with too little due diligence. And it all ends in tears:
Another Fishy Hedge Fund

October 13, 2005
By Justin Hibbard and Adrienne Carter
Business Week

A mysterious money manager, nonstop hype, plunging returns, empty offices, and now an SEC probe -- the intrigue at Wood River deepens.

Ketchum, Idaho, is the kind of place where people tend to know each other. Close to the Sun Valley ski resort, the tony town of 3,873 boasts several Wall Street refugees who manage money for wealthy neighbors and clients elsewhere. Yet few residents say they know John Whittier, a 39-year-old money manager who moved to the area about five years ago and opened an office for his fledgling hedge-fund firm, Wood River Capital Management, named for the picturesque river that runs through Ketchum.

Locals describe Whittier as an absent-minded-professor type who drives a Lincoln Navigator and sometimes fetches his morning coffee from a Tully's café in his pajamas. Beyond that he keeps to himself, they say. Investors in Wood River's funds apparently didn't know much about Whittier, either. The ex-stock analyst at investment bank Donaldson, Lufkin & Jenrette presented himself as a savvy stock trader overseeing hundreds of millions of dollars for investors. Marketing materials for his flagship fund trumpet 25% returns in the first eight months of this year, a period when the stock market was basically flat.

But some investors got nervous and tried -- unsuccessfully -- to get their money back late last month when Whittier's big bet on an obscure Silicon Valley stock slumped badly, say investors' lawyers. The firm stopped answering its phone. Last week, Wood River's offices in downtown Ketchum were locked and apparently unoccupied. FedEx packages piled up outside next to strollers and a red wagon left by Whittier's two young children.

Wood River is now the subject of a preliminary investigation by the Securities & Exchange Commission -- the latest hedge-fund scandal that is sure to intensify calls for greater government oversight of these lightly regulated investment pools. Only two weeks ago the founders of collapsed Bayou Management, a hedge fund in Stamford, Conn., pled guilty to criminal fraud.

As in the Bayou affair, Wood River presented red flags that careful investors should have noticed. The firms Wood River's promoters named as its outside auditor and bookkeeper, for example, say flatly that they didn't provide those services to the hedge fund. Morgan Stanley (MWD ), listed in April as one of the hedge fund's two prime brokers, in fact was not, according to a person familiar with the matter...
This is just the start of quite the lengthy article and one well-worth reading. The full version can be found here, courtesy of BusinessWeek.com.

-- MDT

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