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 He has since withdrawn all his money, according to Lawrence Kellogg, an attorney at Levine Kellogg Lehman Schneider and Grossman LLP, who is representing Mr.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.