Lawsuits Against Georgia Hedge Fund Piling Up

ATLANTA (HedgeWorld.com)–A potential hedge fund blowup is bubbling over in the former homeland of the boll weevil.

A Georgia hedge fund management firm, International Management Associates LLC, and a related entity, International Management Associates Advisory Group LLP, have seemingly dissolved overnight. Some $150 million in investor assets is thus far unaccounted for and a number of investors, including several current and former National Football League players, have sued the two firms and their principals in the hope of recovering whatever assets are left.

The Securities and Exchange Commission opened an investigation and on Monday [Feb. 27] joined the lawsuit parade, filing a civil complaint in federal district court in Georgia. In that complaint, the SEC alleges that "virtually all of the assets of the funds have been dissipated."

Massachusetts securities regulators have begun proceedings to revoke the firm's registration there and recover assets for investors in that state.

A judge in Fulton County, Ga., where the plaintiffs filed suit against IMA and IMA Advisory, appointed a receiver to sift through the firms' books and track down assets.

And while all this has been going on, that same Georgia judge over the weekend issued a bench warrant for the arrest of Kirk S. Wright, a principal at IMA and the man listed with Georgia state securities regulators as the chief investment officer for IMA Advisory. The police are now looking for him and he has been labeled a fugitive.

The trouble started in December, according to court documents, but didn't really come to light until earlier in February, when the Wall Street Journal found the lawsuit filed by the football players and wrote a story about that and IMA's other troubles, which included the departures of two principals–anesthesiologists Fitz N. Harper Jr. and Nelson Keith Bond. They left at the end of January. Subsequent redemption requests from IMA investors totaled tens of millions of dollars, but it's not clear there's any money to honor them.

At one point, IMA and IMA Advisory collectively had about $185 million in assets. That figure is down to about US$150 million now, according to Mr. Wright. However authorities looking into the hedge fund have only been able to find $150,000.

According to the complaint filed by Massachusetts securities regulators, one investor in that state who invested a total of $3.2 million in IMA's Taurus and Platinum funds requested a withdrawal of $200,000 from IMA just prior to Jan. 5. Typically, investors who requested redemptions from IMA or IMA Advisory would have access to their funds the following month.

Around Feb. 5, the investor contacted IMA to follow up on his redemption request. He was given the less-than-reassuring news that "two of the principals of the firm had resigned and the other principal was unavailable," according to the Massachusetts complaint. "He was also told that two branch offices of the firm had since closed."

The two principals who left were Messrs. Harper & Bond, who both resigned as of the end of January. Messrs. Harper and Bond were named in the football players' lawsuit, but not in the SEC complaint or the documents filed by Massachusetts regulators. Although they claim to have done nothing wrong, both are said to be cooperating with the SEC, the FBI and the U.S. Attorney's Office.

It was unclear which branch offices had closed. IMA–which managed US$166.6 million in the Platinum I, Emerald, Taurus, Growth & Income, and Sunset hedge funds–at one time was registered as an investment adviser with regulators in 20 states, including Massachusetts. Its registration status in Ohio and Tennessee was terminated in 2004, according to the most recent form ADV filed with the states, and Massachusetts suspended the firm on Feb. 22 once it learned of the investor lawsuits. On its form ADV, IMA listed branch offices in Las Vegas, Los Angeles and New York.

IMA Advisory also was registered as an adviser with regulators in California, Nevada and Georgia. It listed a branch office in Los Angeles. IMA Advisory managed the Platinum II and Emerald II funds, with $18.1 million in assets.

Determining exactly where the balance of investors' money went is the goal of the growing number of lawsuits naming Mr. Wright and IMA as defendants.

Mr. Wright has retained an attorney–Jacob Frankel of the law firm Schulman, Rogers, Gandal, Pordy & Ecker in Rockville, Md.–to represent him in the SEC matter. Mr. Frankel has said publicly that once all the information comes out, investors will be satisfied with the outcome. Mr. Wright no doubt hopes so, anyway, given the size of some of his investors.

Among the plaintiffs are:

Stephen Atwater, a 6-foot-3, 220-pound (playing weight) former Pro Bowl free safety for the Denver Broncos who retired in 1998;

Clyde Simmons, a 6-foot-5, 290-pound former Pro Bowl defensive who spent eight seasons with the Philadelphia Eagles before retiring from the Chicago Bears in 2000;

Terrell Davis, a 5-foot-11, 210-pound former Pro Bowl running back for the Denver Broncos;

Rod Smith, a 6-foot, 200-pound Pro Bowl wide receiver for the Broncos;

Ray Crockett, a 5-foot-10, 185-pound former wide receiver who also played for the Broncos before retiring from the Kansas City Chiefs in 2002; and

Blaine Bishop, a 5-foot-9, 203-pound safety who played in Houston, Nashville and Philadelphia.

At minimum that's 1,300 pounds and 36 feet worth of angry current and former football players. Their collective investment in IMA was sizable, as well, totaling some $15 million.

Mr. Wright told the Wall Street Journal that he had been threatened by an investor, but the story did not say which investor and there was no indication it was one of the football players.

In the end Mr. Wright may be right and everyone will wind up happy. But events in the weeks leading up to the filing of the lawsuit, events detailed in court papers, give every indication that the football players were genuinely concerned about their investments even late last year and got no reassurance from IMA that things were fine. By Feb. 22, both the outgoing voicemail message for IMA's Marietta, Ga., office and the text of its web site validated that concern and reflected the firm's new reality.

Visitors to the web site, www.imafinance.com, found the following message: "You have reached the website of International Management Associates. This site is temporarily closed and a court appointed receiver is currently reviewing the financial situation of the company. All financial transactions have been frozen while the receiver completes his review. The receiver will update this message with additional information as it becomes available." Callers heard a similar message.

That receiver, according to court documents, is William F. Perkins of the Atlanta accounting and financial consulting firm W.G. Hays & Associates LLC.

According to the judge's temporary restraining order, the football players, their families and various trusts in their names invested $15 million in the IMA Platinum I and II funds, the Emerald I and II funds and $2 million in a so-called house account that aggressively pursued very high returns, up to 10% in one month.

What the players, and other investors in IMA, did not know, according to court documents, is that IMA was heavily into short selling. In particular, IMA shorted Time Warner Inc., which, while it has had its ups and downs since plunging to below $10 per share in mid-2002, has generally traded in a range of between $16 and $19 per share. Not much short hay to be made there.

As it happens, that bad short bet may say a lot about what happened at IMA and IMA Advisory. It could be one of the reasons that, according to the SEC complaint, IMA routinely lied to its 500 or so investors about the returns the firm was generating for them. Starting at least in 2004, IMA "grossly misrepresented the value of remaining assets in the funds attributable to the specific investor and have grossly overstated the rate of return for the respective investor's interest," according to the SEC complaint.

Mr. Wright, on behalf of IMA and IMA Advisory, sent out regular account statements to investors. Recently those statements have not reflected reality. Statements sent to one investor cited in the SEC complaint showed an investment in the Taurus Fund growing 20% during the year between Dec. 31, 2004, and Dec. 31, 2005. In fact, according to the SEC, the assets of the fund were mostly gone; the SEC doesn't speculate where or how.

In another instance, Mr. Wright responded to investors who asked to see brokerage account statements by showing them copies of statements that supposedly reflected four Ameritrade brokerage accounts with a total of $155 million in them. But according to the SEC, three of the accounts referenced on the statement don't exist and the fourth is not held in the name of Mr. Wright or any of the IMA entities.

The SEC said that from January through the end of April last year, the Platinum II and Emerald II hedge funds lost more than $10 million–or more than half their total combined assets–through various bad trades.

All of which leads us to the end of January when two of the football players–Messrs. Atwater and Bishop–having placed their redemption requests at the beginning of December, expected the money wired to their bank accounts. But instead of wiring the money, Mr. Wright deposited checks totaling more than $6 million directly into their accounts. Those checks were drawn on an account at a company called BrenMore LLC, an entity with which the players were unfamiliar and that got exactly zero hits recently in searches on Google, and web sites maintained by the SEC and the NASD. Not only that, but the players were surprised to discover their forged signatures and bank account numbers on the backs of the checks. All of the checks bounced.

After that, Mr. Wright told the two men they would not get their money for another six weeks. When the players demanded the funds be audited, Mr. Wright refused, according to the judge's restraining order, denying them access to fund records. The account statements sent to them by Mr. Wright show balances of more than $18 million, but the players can't verify that.

As the receiver combs through IMA's finances, sheriff's deputies have been executing orders to seize the passports of Mr. Wright and Messrs. Harper and Bond, as well as computers, personal digital devices like Blackberries and Palm Pilots, cell phones, fax machines and all records relating to the two firms and the seven hedge funds.

And yet another group of investors, all non-football players, is considering filing a separate lawsuit.

The first big hedge fund brouhaha of 2006 appears to be officially under way.

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Contact Bob Keane with questions or comments at [email protected].