Chris Gillick contributed to this story.
This week, alarms sounded at Long Island investment firm NIR Group - which manages over $7 billion - when Forbes reported that investors were suing because they believe the fund has been reporting bogus returns.
But Dealbreaker has learned that well before Steven Mizel and Palmetto Partners filed suit in March, NIR, based in the Long Island suburb of Roslyn and founded by 38-year-old Corey Ribotsky, had tried to bribe an investor from going to the press after NIR suspended redemptions on its AJW Partners Fund back in October 2008.
Sequoia Sun, who runs a restoration project for a humanitarian-aid-delivering sailboat called Schooner Dolphin in Norwalk, Connecticut (just across the Long Island Sound from Roslyn), wanted to warn investors last fall about the trouble he had redeeming his money.
But Ribotsky would have none of it, as a member of his staff tried to bribe Sun in exchange for not going to the media. Specifically, the staffer offered Sun a discounted portion of his invested principal if he signed a confidently clause and pulled his quotes for a story that was set to run in a New York City-based newspaper. Sun turned down the bribe, but the fund turned the tables on him, telling the newspaper's attorney its source was actually trying to bribe the fund! While the paper never proved there was any bribe, it withheld the story anyway.
The AJW Partners Fund, which currently claims to have $780 million under management and invests in PIPE (private investment in public equity) debt deals, had allowed for quarterly liquidity with 90 days notice prior to its suspending of redemptions on October 16. Sun had sent a redemption request for his entire $250,000 principal investment plus accrued returns in May 2008, and was expecting his funds to be delivered on September 30, 2008, after several assurances by NIR staff that it would be honored, according to a letter sent to the fund's counsel, Boston-based Bingham McCutchen, from Sun's counsel, Aspen, Colorado-based Allen, Wertz, and Feldman.
The funds never arrived.
As a result, Sun was forced to halt his Schooner Dolphin project and lay off workers, while also putting the brakes on a water sanitation project he was about to bankroll. Desperate for liquidity and to return to his humanitarian work, Sun turned to the secondary market and sold his stake in AJW for 65 cents on the dollar, losing some of his original principal and roughly all of the accrued returns.
While Sun is no longer an investor in AJW, he has reason to be suspicious of why his money was not redeemed. Ribotsky wrote in an October letter to investors that he needed to preserve cash to make more PIPE loans and take advantage of the distressed credit markets as banks had swiftly cut back on lending. Yet according to San Diego-based Sagient Research Systems, who tracks PIPE lending, NIR did no new deals in 2008. Another reason to be suspicious is the purported track record of AJW.
Call it Madoff-on-Steroids.
According to a June performance report obtained by Dealbreaker, the fund boasts a 52.45% compounded annual rate of return since January 1999, with only five down months. The fund's worst year was 2008, returning 13.14%, while the fund is up 2% through June year to date and manages $781,504,872 million in assets.
Meanwhile, NIR's reorganization of the fund, which was announced along with the redemption halt, has left some investors questioning the marks of the assets and returns. The reorganization offered investors three options, according to a letter obtained by Dealbreaker:
1. Be given interests in a new share class, Class A, with a 3-year lock-up and reduced fees of 1-and-15.
2. Be given interests in a new share class, Class B, with no lock up, quarterly liquidity of up to 12.5% of one's investment, and reduced fees of 1.5-and-17.5.
3. Remain as is, with no redemptions allowed, while still paying the standard 2-and-20 fees. (If investors did not respond to the request, they were given option 3.)
As a result, the parties who sued NIR in March, Mizel and Palmetto Partners, who have a combined investment of $1.7 million in AJW, have thrown down the gauntlet and challenged the firm to let them inspect their books. (They're not the only ones who have taken matters into their own hands. Long Island businessman Gerald Tucci sent thugs to Ribotsky's office to demand an immediate withdrawal back in November. Tucci and Ribotsky eventually settled earlier this year for an undisclosed amount.)
According to investors in the fund, AJW Partners met their March 31, 2009 quarterly distribution of new Class B shares with only a token payout of 1 percent of principal. This was the first time investors got any cash out of the fund since the October reorganization.
"There is clearly either an unwillingness or inability to part with cash," said an investor who wishes not to be identified for fear of retribution by the fund. "And if AJW does really have the cash and chose instead to invest in new or existing deals, then Corey is acting more in the interest of the fund than his investors." The fund did not return calls for comment at press time.
Investors have complained that the only audited document they see is their yearly cash flow statement prepared by Jean-Paul Schwarz at Melville, New York-based accounting firm Marcum, formerly known as Marcum and Kliegman. A spokesperson for the auditor told Dealbreaker they do not audit AJW Partners' monthly returns and are not responsible for the PIPE deal valuations that make up the fund's investment portfolio. That task falls to WTAS, an asset valuation firm with 14 offices in the US, according to Ribotsky who was quoted in the Forbes story. However, a WTAS spokesman told Dealbreaker they no longer work with N.I.R. Group and would not comment on what was found in past asset valuations.
While investors are frustrated about the sudden lock on their cash, what is more alarming is the fact that Ribotsky won't simply show them his books and spell out who all the companies are in which he has made these PIPE deals, what interest he's charging, or if the loans are even paying.
Past deals show that the fund's questionable investment strategy is to lend to penny-stock, struggling companies at high-interest rates, usually about 15 percent; in return AJW Partners gets warrants to purchase the borrowers' stock at a discount up to 75 percent. If the stock price declines during the term of the loan, AJW Partners gets more shares. The strategy appears to have allowed Ribotsky to steer clear of some of the credit crunch pitfalls that have befallen many hedge funds and forced many to close under the weight of huge withdrawal requests.
Yet all is not rosy for Ribotsky, according to internal SEC documents seen by Dealbreaker. As of May 2008, the fund was being investigated, but no charges have been made. Sources close to the fund, who have also spoken to the SEC, say that the regulator is likely looking at securities fraud as allegedly the firm also shorts the stock of the companies it lends to. This type of trading is illegal because it breaks the covenants of its PIPE loan terms. Additionally a source who has worked with the fund says the principal value of it notes are inflated because Ribotsky just rewrites the notes and adds paper profits to the original principal. What could not be clarified is how much of a management fee investors are paying on that paper asset value.
All the while, Ribotsky has profited nicely from his winning strategy on the AJW Partners fund -- pocketing an estimated $35 million in fees last year -- based on his fee of 2 percent of assets under management and 20 percent of profits. Ribotsky seems to spend a bit of his earnings on fancy toys, tooling around estate-laden Old Westbury, Long Island in either a Ferrari, Porsche or Cadillac Escalade - and buzzing the Long Island Sound in a 39-foot fiberglass power boat. In 2006 he spent considerable time on his Hollywood hobby as executive producer in an independent film called American Cannibal. Ribotsky has also used his financial success to support several charities in the New York metropolitan area, serving on the Boards of Trustees of the Children's Medical Fund of New York, the North Shore/LIJ University Health System, and the Onyx and Breezy Foundation, according to the biography on NIR's website.
So when it all adds up, Ribotsky offers little transparency to investors and stiffs those who want to redeem money, not to mention flaunt his new-found wealth and hobnob on the New York charity circuit. Does this sound like another person we know?
-Teri Buhl and Chris Gillick