Former Paulson And Co Investor Isn't Buying The "Oops, I Invested In A Horrible Stock" Act

Author:
Publish date:
Updated on

Remember the Paulson & Co Sino-Forest investment? Turned out to be one of the fund's less than stellar ideas? Will get you an hour in the office hole for mentioning it? Most people affected by the trade have so far been willing to let it slide, perhaps preferring to focus their energies on bigger beefs with JP (such as why only the Platinum Level P&C Members got a check to cover their 2012 losses), and probably also chalking it up to Paulson having an unfortunate brain freeze for the majority of last year. Hugh F. Culverhouse, not so much. The former investor, who filed suit against the hedge fund today, senses something more nefarious at play, the basis for his reasoning being that he doubts Paulson could be that stupid.

Hugh F. Culverhouse, a former federal prosecutor and Miami-based investor whose family once owned the Tampa Bay Buccaneers football team, filed the lawsuit Tuesday morning in U.S. District Court for the Southern District of Florida. Mr. Culverhouse, a longtime investor in various hedge funds, once invested more than $12 million in five different Paulson funds...Mr. Culverhouse began investing in Mr. Paulson's funds in 2008. He withdrew his money in the fall of 2010 but reinvested it in January 2011, before the Sino-Forest losses. He has since withdrawn all his money, according to Lawrence Kellogg, an attorney at Levine Kellogg Lehman Schneider and Grossman LLP, who is representing Mr. Culverhouse.

The lawsuit, filed as a class-action suit, alleges that Mr. Paulson's firm "failed to expend the resources to conduct the proper initial due diligence into Sino-Forest's operations," and that the firm "failed to properly monitor" its investment. The lawsuit also alleges "gross negligence and a breach of" the duties of Mr. Paulson's funds to its investors. "With just the basic due diligence, the Paulson companies could and should have foreseen Sino-Forest's problems," said Harvey Gurland, an attorney at Duane Morris LLP, which also is representing Mr. Culverhouse. "Instead, Paulson simply threw money at the company with a shocking disregard for the financial well-being of its investors."

According to a representative for the firm, there is no way Paulson et all could have seen this coming.

"As a passive investor in public companies, Paulson has access to the same information that everyone else in the securities markets does," said the spokesman for Paulson & Co. "Like other public market investors, we must rely on audits and underwriter due diligence for comfort that financial statements and disclosures are accurate."

According to Culverhouse, last he checked, this wasn't amateur hour.

Mr. Gurland said that the flaws in the approach of Sino-Forest should have been obvious to a sophisticated hedge-fund manager.

Former Investor Sues John Paulson's Hedge Fund [WSJ]

Related

Hedge Funds

Paulson and Co Investor Finds New And Interesting Way To Kick John Paulson When He's Down

As Paulson and Co employees, clients, and people named John Paulson do not need to be told, the past year and half has not been the most joyous of times for the hedge fund giant. After making billions shorting subprime mortgages, the firm ended 2011 down 55 percent, was down 16 percent through the first half of 2012, and as of July, saw assets under management decline 44.9 percent to $21 billion from $38.1 billion, due to a combination of unfortunate performance and redemptions by investors so angry at the fund that they've felt the need to repeatedly tell anyone who will listen that parting ways with P&C was among the best if not the best decision they've ever made. One investor that hasn't had to consider voicing its unhappiness to the press or even worry about losing money at all? The 92nd Street Y. Last November Paulson guaranteed that he would personally cover their losses, whatever they turned out to be, come year-end. And the generosity did not stop there: for this one investor only, Paulson offered his services pro-bono, waiving all fees. So while he probably didn't expect representatives of the Y to rent a skywriting plane to proclaim their love and appreciation for him over midtown, lobby the city of New York to get 92nd renamed Paulson Street, or have his face tattooed to their chests, he probably also figured they wouldn't turn around and hit him the mother of all slaps in the face. In this case the declaration that despite the highly favorable terms of their arrangement, any involvement with P&C still felt a tad too risky for everyone's comfort level. In the midst of the financial crisis, the 92nd Street Y came up with a sweetheart deal for its endowment: investments in funds run by the likes of John Paulson, Marc Lasry, and other hedge-fund luminaries that were fee-free and guaranteed against losses. The strategy performed well for several years, said people familiar with how it worked, as the Y benefited from risk-free investing in some of the fund industry’s most successful strategies. But, concerned about the impact of a catastrophe in which a money manager couldn’t repay losses and eager to construct a more diversified portfolio, the Y recently opted to redeem its hedge-fund investments, these people said, and rebuild its financial strategy from scratch. Paulson himself is worth $15 billion, so a catastrophe in which he couldn't repay the Y's losses would have to be a big one. And don't give him some line about how you're pulling out of all hedge fund investments and it's not personal. You could have let him have this. Despite Sweet Deal, 92nd Street Y Redeems Paulson Money [CNBC] Earlier: John Paulson: I’ll Get The Losses This Year, Next Year We Go Dutch?

Hedge Funds

Bonus Watch '13: Paulson And Co.

The bad news: even if Paulson and Co. turns things around in 2012, they might not get to collect performance fees, on account of being under water due to last year's annus fucking horribilis. The good news: John Paulson's employee will still get paid, because that's just the kind of guy he is. Paulson’s flagship fund, Advantage Plus, fell a whopping 53 percent last year – prompting an apology to investors and a media drubbing. The decline also meant that it could be years before Advantage Plus and other fallen Paulson funds are able to return to their high-water mark, or the returns level at which John Paulson and his colleagues can begin to collect a significant percentage of their annual gains as performance fees. In an acknowledgement of that problem, Paulson recently told some employees he would reset the firm’s internal high-water mark to zero as of Jan. 1, said the person familiar with the matter, effectively meaning that if the company’s funds are in the black for 2012, those employees can collect bonuses pegged to this year’s returns and not be dragged down by last year’s losses. Paulson will pay for those bonuses himself, this person added. John Paulson Lowers the Bar to Pay Employees [CNBC] Related: John Paulson: I’ll Get The Losses This Year, Next Year We Go Dutch?

Hedge Funds

John Paulson Does Not Have To Defend Himself To You, Hugh

Remember Paulson & Co's investment in Sino-Forest? One of the less than stellar trades that helped contribute to 2011 being an annus fucking horribilis for the hedge fund? Got a former investor named Hugh F. Culverhouse all riled up, shouting about "gross negligence" and "failure to properly monitor" the situation and making claims that it was clear no one at P&C bothered to perform any due diligence on the company, because if they did, "the Paulson companies could...have foreseen Sino-Forest's problems?" Things actually worked out for JP&Co on this one.