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[Interlude] No good deed goes unpunished, not if charity goes un-resented.
>>Fox: Welcome back to Bloomberg Business Week from Bloomberg radio. I’m Pimm Fox.
>>Prewitt: And I’m Ken Prewitt.
>>Fox: What happens when a man announces his own firm is looking into account improprieties?
Here to tell us more about what happened to former hedge fund manager, Dan Zwirn, is Bill
Cohan, who wrote the story in this week’s issue and joins us from NYC. Bill, let’s
say right away that you know Dan Zwirn, you used to work with him.
>>Cohan: Yes, many years ago Dan worked for me as an analyst at Lazard [Lazard Ltd] when
I was a banker and he was right out of college.
>>Fox: Step back and tell us who is Dan Zwirn because this is like a story from the Bible
almost – it starts off with a Gulf Stream jet, which is not in the Bible, but the fall
from grace part gets pretty heavy.
>>Cohan: Well, Dan was always a superstar, even when he was at Wharton, where he went
to undergraduate, he got two degrees at the same time in four separate subjects.
>>Prewitt: That’s better than you right bill?
>>Cohan: Just slightly better than me, I may have more graduate degrees than he does. Then
you know he went to Lazard, then Harvard Business School, [he] clearly saw very early he wanted
to work in private equity, he worked at Madison Dearborn [Madison Dearborn Partners, LLC],
and then he moved quickly to the hedge fund world and then by 33 he had his own 500 million
dollar pile of money to manage in his own hedge fund. Literally he was like a rocket
ship from early 2004, 2005 2006 and into 2007, his funds increased from $500 million to $5
billion and his net worth zoomed up to something like $700 million dollars. This is when he
decided he needed his own Gulf Stream jet, he had offices around the world, fancy offices
on 5th Avenue - I mean this guy was absolutely a legendary, young, hedge fund guy.
>>Prewitt: He was getting returns of 20-21% a year Bill. How was he doing that?
>>Cohan: Well it’s so interesting Ken, he had a modest, I guess you could say, desire
to make 1% returns a month. His strategy was completely different from any other type of
hedge fund manager. Instead of taking long/short risks, or using highly technical computer
models to look for discrepancies in the way stocks or bonds were trading, he decided there
were all these small companies out there who couldn’t get access to capital markets - kind
of like a mini Mike Milken strategy when he created the junk bond market in the 80’s
for companies who could not get access to the corporate debt market that was for more
highly rated companies. Milken basically created the market for companies who had lower credit
ratings - paying higher yield to investors - and could get access through the public
junk bond markets he created. Well Zwirn did something else, something similar, for the
private companies that were small and couldn’t get access to credit lines and credit facilities
from banks - their credit wasn’t sufficient enough or they weren’t big enough or their
credit line wasn’t big enough - but there were all these companies out there and Dan
Zwirn decided to provide the financing to them.
>>Fox: Well what happened to Zwirn, because it didn’t end, well, terribly badly for
him - although his bank account would say something different - but he does have two
pieces of Lucite on his desk, which is a testament to several years of battles.
>>Cohan: Well the allegation is that the CFO of the [D.B. Zwirn & Co.] hedge funds starting
moving money around improperly to pay for, in one case, the Gulf Stream jet - took management
fees before they were due, used money from an offshore fund to make investments in an
onshore fund, which was not allowed. Basically when Zwirn found out about these things he
reported all these facts to the SEC, he hired two law firms to investigate them in detail,
turned those reports over to the SEC, figured he’d get relatively quick treatment from
the SEC for self reporting - where it was determined Zwirn did nothing wrong and it
was also determined that the CFO, Perry Gruss, had not taken any of the money himself but
did things in violation of the investors advisors act of 1940 - and unfortunately that didn’t
work out anything like what he thought would happen. The SEC investigation went on for
four years, PricewaterhouseCoopers, the auditors, wouldn’t release the audit for a given year
in time for investors to get their K-1’s. Investor’s couldn’t get their K-1’s
so they couldn’t make their own tax filings so they pulled their money from the fund even
though the fund had been performing very well, and basically the fund had no choice but to
close up its doors and sell its loan portfolio to Fortress Investment Group [Fortress Investment
Group LLC] which is now managing it. In the meantime, Zwirn gets’ absolved by the SEC
but he doesn’t have a hedge fund anymore and his net worth is reduced something like
99%.
>>Fox: What about the investors, did they come out whole?
>>Cohan: Well, by and large, the investors obviously did well during those 4 years when
Zwirn managed the fund. And now that the efforts are being managed by Fortress it’s unclear
[how the investors are doing] because Fortress hasn’t released any info publicly how the
funds are doing. But basically I think - I talked to one investor who said he would invest
with Dan again, because Dan was a very good investor and didn’t do anything wrong -the
cautionary tale here is whether or not when you find these accounting irregularities,
even though there’s nothing criminal, it’s in your interest to report it to SEC thinking
if you do it in timely basis that the SEC will agree with you and allow your fund to
continue operation. But in fact the outcome was much worse than Dan could ever have expected
because the SEC investigation did absolve him - although the SEC has sued Perry Gruss,
the CFO, and that litigation is pending -but investors ran for the exits and he [Zwirn]
>>Fox: Bill Cohan who wrote the story in this weeks issue of Bloomberg Business Week about
the hedge fund manager, well former hedge fund manager, Dan Zwirn.