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CRAIN’S CHICAGO BUSINESS
Hedge Fund Flop Hits Huizengas
USA TODAY
By Ann Saphir
August 12, 2007

The wealth manager for the Huizengas, among Chicago's most prominent families, says it got a reassuring update from one of the biggest local hedge funds in June of last year.

The update included a chart showing that the fund, in which the family invested $10.6 million, was well-diversified, according to a lawsuit the Huizengas filed against Lisle-based Ritchie Capital Management LLC.

Turns out, the lawsuit claims, it wasn't. The fund was devoted almost entirely to a controversial vehicle known as death bonds. Now the Huizengas, whose fortune was made in trash hauler Waste Management Inc., allege they were defrauded, according to the suit filed in Cook County Circuit Court. Ritchie Capital says it made no promises to diversify.

The spat shows the pitfalls of investing in the lightly regulated hedge fund industry, where closely guarded investment tactics are used to target big returns. Secrecy serves investors by thwarting would-be copycat traders. But as the industry grows, hitting a record $1.7 trillion last quarter, more investors are discovering that secrecy has its downside: Some hedge fund trading plans, from Connecticut-based Amaranth Advisors LLC's natural gas bets to New York-based Bear Stearns Cos.' foray into high-risk mortgage-backed securities, have gone spectacularly awry.

"We're going to see hedge fund implosions all over the country and investors claiming that they were misled," says Jacob Zamansky, a New York securities lawyer who is representing an investor in an arbitration claim against Bear Stearns' two failed hedge funds. "The problem really is the lack of transparency and disclosure."

A Ritchie Capital spokesman declines to discuss the suit, filed in April, but says the fund does "its best to communicate appropriately with its investors and is continuing its efforts to be transparent beyond what is required or customary for a hedge fund."

The complaint alleges Ritchie Capital provided false and misleading materials, failed to disclose important facts and had discrepancies in its books. "Legal action has been a rare last resort, but unfortunately we felt we were given no option," the family's fund manager, Peter Huizenga Sr. of Oak Brook, says in a statement. "Honesty and trust are fundamental to what we do and are qualities we expect in the people we deal with." The family, whose notables include Miami Dolphins owner H. Wayne Huizenga, says in the lawsuit that their investment could be "a total loss."

The fund in which the Huizengas invested bet virtually all its money on death bonds, the suit says, a vehicle that has garnered growing popularity on Wall Street.

Seniors who want quick cash can sell their life insurance policies to an investor who collects the benefit when the policyholder dies. The senior typically uses a broker, who shops the policy to get the best price. Ritchie and partner Coventry First LLC of Pennsylvania had assembled hundreds of policies, which they planned to tie to death bonds to sell to other investors.

But in October, then-New York Attorney General Eliot Spitzer opened an investigation into Coventry for allegedly giving kickbacks to brokers who agreed to direct business to the firm. The inquiry is still pending. In May, Ritchie Capital sued Coventry for fraud, seeking $2.1 billion. The suit was dismissed last month, but Ritchie said it would refile before Aug. 10.

Two entities owned by Ritchie Capital have since filed for bankruptcy protection in New York.

Ritchie Capital's founder Aaron Roberts Thane Ritchie, 41, has pedigree and star quality: At 12 he began working for his father, a well-known trader at the Chicago Board of Trade. He also was a standout linebacker and tight end at Wheaton College and later played briefly for the Pittsburgh Steelers and the Chicago Bears.
Ritchie Capital, which had $2.8 billion under management as recently as October, reported double-digit returns from its start in 1997 through 2004.

In 2005, Mr. Ritchie invited the Huizengas to invest in a new fund targeting a "wide range" of strategies in the insurance business, according to an offering memo attached to Mr. Ritchie's motion to dismiss the suit.

But by then, bad bets on natural gas were eating up returns at the firm's main fund. Investors began asking for their money back, so Mr. Ritchie shifted investments to less-liquid assets and restricted payouts. The new fund appeared profitable, based on updates provided to the Huizengas in 2006 that described "home runs" in a diversified portfolio, the suit claims.

Ritchie Capital's July 30 court filing describes the Huizengas' wealth manager, Huizenga Managers Fund LLC, as "a sophisticated investor that made a high-risk investment" with the full understanding it could lose its money. Ritchie Capital argued it's not liable.

This year, Ritchie Capital began selling off parts of the business and in April sold $1 billion in assets to competitor Reservoir Capital Group in New York. Now it's begun the process of selling the life-insurance policies, Bankruptcy Court filings show.

If the Huizengas are right, "we're going to be concerned," says Jeff Marwil, a lawyer for Winston & Strawn LLP who represents the nine biggest investors in the Ritchie entities in bankruptcy.

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