WILMINGTON, Del. (CN) – After Steel Partners, a hedge fund managed by Warren Lichtenstein, lost 43% of its assets in 2008, Lichtenstein not only suspended payments, he “unilaterally reorganize(ed) the Steel fund, permanently locking in investors’ capital as well as fat fees for years to come,” Bank of America claims in Chancery Court. It demands $15 million.
BofA, sued as Master Trustee of ACF Master Trust. It says ACF invested $15 million in Steel Partners Offshore Fund in July 2005; the fund later changed its name to Steel Partners II Offshore Ltd.
BofA claims that it was part of the “38% of Steel investors” who demanded redemptions after the hedge fund lost “approximately 43% of its assets on a net basis in the first 11 months of 2008.”
It claims that “Rather than pay such redeeming holders in cash or in kind – as provided for in the applicable documents – Steel has instead responded to the crisis created by its mismanagement of the fund by suspending its redemptions. But unlike other hedge funds that have invoked such suspensions – some of whom have also waived or reduced their fees in an effort to aid investors – Steel has taken the unprecedented step of unilaterally reorganizing the Steel fund, permanently locking in investors’ capital as well as fat fees for years to come Lichtenstein. Indeed, under Mr. Lichtenstein’s scheme, investors who were entitled to withdraw capital directly from the hedge fund they invested in based upon the actual value of the funds investments, will have their redemption rights eliminated. Instead, investors will be left on their own to find buyers for newly issued units in a Lichtenstein-controlled public partnership in an uncertain market as their sole means of recouping their investments. In stark contrast, the scheme provides Mr. Lichtenstein with locked up permanent capital from which to draw fees for his exclusive benefit. None of this is what was promised by Mr. Lichtenstein and Steel when they took investors’ money.
“Mr. Lichtenstein apparently decided to turn the stumbling blocks of his poor performance and the rampant withdrawals from the fund into a path to perpetual fees and possible other profits by using people who entrusted him with their money as his unwilling stepping stones. He has created a scenario in which he is guaranteed to win and they will lose, not only by assuring himself an ongoing stream of fees for many years to come, but also by creating for himself an opportunity to buy their interest in the former fund ‘on the cheap’ in the market. He also particularly made sure that he is the only one who gets to choose whether they win or lose; his investors are being forced into the new scheme whether they like it or not.”
BofA demands rescission and damages for fraud, breach of contract, and negligent misrepresentation, and appointment of a receiver. It is represented by Stephen Jenkins with Ashby & Geddes.