The hedge fund that kicked Veronica Hearst out of her Palm Beach mansion and forced Elizabeth Taylor and Kathy Ireland to bankrupt their jewelry business through predatory financing is now in some trouble of its own. With multiple lawsuits against the firm, along with huge losses in its investments and a lack of liquidity, some investors are balking at the methods the fund used to lock down its capital while returning money to a preferred group. Tied into the mess are questions about what value assets remaining in the fund are now actually worth. There's talk there could be an investor takeover of the fund.
New Stream Capital makes its money through lending, at high double-digit interest rates, to luxury home owners and commercial businesses that find them self in a short-term cash crunch. Preying on distressed situations, they typically secure the financing with assets worth more than the loan, change the terms of the loan forcing the borrower into default, and then load on enormous fees that often take rates above legal usury rates. They also buy life insurance settlement contracts at a discount and bet when the person will die so they can collect. Last August founder David Bryson issued a release claiming the firm had $1.2 billion in assets - a 2008 audit report on the financial condition of New Stream Secured Capital and Subsidiaries shows assets are $724,993,484.
With offices in Ridgefield, Connecticut and New York City, New Stream is run by three general partners David Bryson, Donald Porter, Bart Gutekunst. Warnings of shadiness started in 2007, when senior executives walked out of the firm and told some investors that the life insurance settlements were not being valued correctly and returns on the investment were not going to be what the general partners were claiming. Some investors tried to pull their money out then but Gutekunst smoothed things over by claiming the complaints were baseless and made by a disgruntled employee who was pissed he didn't make general partner.
A year later, some economic market forces out of New Stream's control have negatively affected them, such as values of the residential real estate that secure their loans tanking. But Dealbreaker has learned that poor risk management in their life insurance investments is more to blame for the fund spiraling into $48.8 million of negative equity last year. In December new insurance industry metrics became official, which extended life expectancy by around 15 years and the secondary market devalued insurance settlements over night.
"The metric change on life expectancy wasn't an industry secret, they should have hedged their risk in this or reserved some cash," says a current investor. The funds just released audited 2008 financial statements, seen by Dealbreaker, shows the face value of the funds contracts are $704,952,034 yet the fair value of the life settlement contracts is now $126,875,112.
On top of that, interest paid on structured leverage-- which most investors didn't even know was still in the fund--sucked cash out of the kitty, leaving little to return to investors whose 90-day redemption notices have already been signed and promised.
When the fund managers began realizing they didn't have enough cash to meet over $100 million in redemptions and it could force the fund into liquidation, a December 17th letter suddenly announced they weren't going to pay everyone off evenly. According to investors and the fund's own internal communication, an arbitrary date of September 30th was picked to draw the line on redemptions and those who didn't meet that date, even though they'd submitted redemptions months before, would now have their investment valued at December returns that were double-digit negative. This is where some investors have really called foul play; while the fund claims a majority vote by investors this April agreed to the new redemption plan, investors who had been allowed to redeem and were turned into creditors instead of equity holders were also allowed to vote.
One investor who spoke with Dealbreaker on the condition of autonomy for fear he'd never get his money back said, "We still don't have an official 2008 ytd return yet but I was emailed estimates that we could be looking at a negative 41.74 percent - most of the hit came from December returns." For 06/07 the fund had positive returns of 12 percent and according to HedgeFund Net the asset-backed lending index was up 5.27 percent for 2008.
Given the life insurance portfolio proved to be a disaster, investors are now worried about the value of real estate asset and the funds ability to collect on them. In the last few weeks over $20 million shares in the fund are for sale at Hedgebay with offers as low as 60 cents on the dollar but no offers have been made for the desperate investors' shares.
In May, investor Stratos Advisors finally filed litigation in the Southern District of New York. Two months before Stratos quietly tried to settle the redemption dispute with the fund that pretend they wanted to negotiate but never delivered a settlement in writing. Stratos' intent is to get their investment redemption delivered in a fair way as promised. The investor tried to get an open dialog on liquidity and leverage concerns that violates the fundamental investment strategy of the fund. Stratos was told by general partner Bart that the fund doesn't use structured leverage any more; then learned this spring they do. Investors also learned in April through a letter from the fund that not all investors assumed equally investment risk- an issue that was promised to change back in 2007 by the fund managers and clearly never did. Weather New Stream's empty promises are illegal or not, will have to be figured out in court - as recent hostile tactics by the fund don't seem to show they plan to play nice.
New Stream aggressively wrote to clients on May 22 before they'd learned of the litigation against the fund in the press, saying "...the claims advanced by Stratos are without merit, and we are confident that this matter will be resolved in favor of all parties against whom Stratos has made claims." The fund's attorney also threatens in an email that Stratos or their attorney shouldn't talk to the press if they wanted a favorable outcome.
Edward Toptani, Stratos' attorney says, "New Stream clearly violated their fiduciary duties in attempting to adopt the plan of restructuring. It is nothing more than an ex post facto attempt to ratify its illegal actions in December with regard to its refusal to pay investors who've properly redeemed."
A Dealbreaker investigation shows New Stream claims their largest outstanding real estate loan for $28 million, on a one of kind 100 acre Brentwood, Ca estate, is overdue but book it as a viable asset they plan to collect on and earn returns for their investors. Yet we learned the borrower Bloomfield Estates hasn't paid, and the borrower is now in bankruptcy. In the bankruptcy (which has already been going on for two years), Bloomfield is claiming that New Stream violated California's usury laws, which limit lenders to 10 percent interest. A lender can circumvent the usury law if its loan is legitimately arranged by a California licensed mortgage broker; Bloomfield contends that the New Stream loan does not fit within this exception, and that New Stream's use of a real estate broker was a sham. Fund documents show the interest rate on the Bloomfield loan is now 24 percent, and if you add on escalating default penalties and fees, it gets to a whopping 31 percent. Like other New Stream borrowers Dealbreaker has investigated, Bloomfield also contends that it was misled and defrauded by New Stream, which promised to lend additional, needed funds to Bloomfield but never did so. A review of the tangled litigation shows the estate has been winning many of the court battles thus far, and New Stream has not been able to take the property, which includes the personal residence of Bloomfield's owner.
According to Shirley Dreifus, "the notion that the funds goal is to 'loan to own' is often a bragging point of its executives - especially with the Veronica Hearst deal."
Dreifus who ran a Manhattan yacht tour business with her husband says they were forced into foreclosure on the boats by New Stream who lied to her about what the actual loan terms would be. New Stream also forced New York social power house Victoria Hearst into foreclosure last year when she couldn't meet their high interest payments.
Even an investor told us, "The general partners were so proud of the fact that they wrangled Veronica's tony assets from her and would brag that they only lent around $16 million yet they got $45 million of assets from the deal."
What's next for New Stream is yet to be played out in the courts and backroom negotiations. People involved with the firm think if management continues their double talk along with strong arming clients, investors, and even attorneys - it could lead to a revolt. Sources say the next likely move, if the courts can't right the wrongs, is for investors to remove management and attempt to unwind the assets on their own in a fair way.
An investor told us yesterday, "Of all the fund managers, Bart's the biggest smooth talker, but they all have learned to tell a highly distorted version of the truth. Now they are getting caught with their pants down wrapped in their own dirty lies."
Earlier from Teri Buhl: The Real Money Is In Flipping Bank Charters, Not Houses
Teri Buhl is a Wall Street investigative reporter who written for the New York Post, Sunday Business, and HousingWire.com. Her big scoops include breaking news on all things wrong at IndyMac, calling out Bob Steel for lying to investors about losses on CNBC, and shinning a light on Wells Fargo for manipulating earnings with paper accounting gains. She resides in lower Fairfield County, CT.