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In an otherwise very good run down of what happened yesterday at the county pension system’s meeting, the U-T’s Leslie Wolf Branscomb missed what I thought was the biggest news: That the county’s pension board went into closed session to consider suing the now-desperate Amaranth hedge fund for fraud.

According to other news reports, Amaranth has lawyered up with the best attorneys of the bunch to face down a bevy of such legal claims.

So did Amaranth defraud San Diego and others? The county’s contention would be a simple one: Amaranth lied to San Diego officials and claimed the hedge fund had a more diversified investment strategy than it apparently did.

I’ve already said I think that’s a pretty weak argument. Because of their lack of transparency, hedge funds require their investors to trust and have faith in what they say. That’s part of the unquantifiable risk of playing their game. It’s going to be a tough fight to prove Amaranth didn’t do everything it said it would do. After all, they could claim that they did have a risk-control system in place and it just didn’t work as well as they thought it would. Sorry ’bout that.

Amaranth screwed up, obviously, but where’s the personal responsibility on the part of county officials? Are they really going to keep saying that what happened was somebody else’s fault? They purposefully handed over $175 million of the public’s and the county employees’ money to people who told them outright that they would not disclose what they were going to do with the money.

But let’s indulge the county pension folks for a while and go through the question: Was it fraud?

The county pension chairman has already alleged that Amaranth defrauded him and his colleagues.

Were they really in the dark about what was going on at Amaranth?

The Wall Street Journal has a good update today on the Amaranth saga. And the Journal is offering free online access Friday so if you don’t have a subscription you can still read it.

This passage in the Journal story seems to damage the contention that the county and others could have been defrauded.

In interviews in the weeks before this month’s losses, several clients said they were comforted that energy trading wasn’t Amaranth’s sole business and that its other activities gave a financial cushion to ride out rough patches in that market.

For its part, Amaranth can argue that it was no secret that energy drove its profits. And a person close to Amaranth says the hedge-fund firm’s offering documents make clear to investors the high risks involved in energy trading. The fund explicitly credited the energy team for blowout profits in April and blamed energy trading for a $1 billion, or 10%, loss in May.

The county’s claim is simple: Amaranth said it employed a “multi-strategy” approach to generating returns. In other words, the implication was that if one strategy failed, it would be mitigated by the performance of the other strategies.

“Where the hell was that system when this happened?” asked county pension CEO Brian White at Thursday’s meeting.

According to a report the other day in the Financial Times, investors like the county could also claim that Amaranth leaders didn’t properly supervise their star trader – a guy named Brian Hunter, who drove around Alberta, Canada in a Bentley.

This could be an interesting argument. But the fact that the county is leaning toward a legal fight indicates it may be a long time before the pension fund recovers anything from Amaranth.

SCOTT LEWIS

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