OK, here’s the lawsuit the county of San Diego’s pension fund just filed against Amaranth Advisors LLC and the specific managers of that hedge fund, which imploded last fall.
I had some questions about how the county’s people could claim to be victims of a fraud after they made a risky investment that ended up tanking.
After all, don’t risky investments tend to be, you know, risky?
Here’s what the San Diego County Employees Retirement Association has to say about that:
The essence of this action is that defendants perpetrated an ongoing fraud on SDCERA, before and after SDCERA’s investment by knowingly, intentionally, and falsely misrepresenting that the Fund was a “multi-strategy hedge fund” that invested broadly in at least six different market sectors and utilized sophisticated risk management controls. In truth, the Fund, against its own espoused investment policies, effectively operated as a single-strategy natural gas fund that took very large and highly leveraged gambles and recklessly failed to apply even basic risk management techniques and controls to these gambles. As a result of Defendants’ fraud and other misconduct, the Fund collapsed in late-September 2006, resulting in a loss of over $6 billion in Fund value and causing SDCERA to lose more than $150 million.
Actually, there was a rather amusing point in the complaint. On Page 4, there’s a sentence related to Brian Hunter, the young trader whose investment gambles ended up killing Amaranth. There was a lot of talk, as the Amaranth story was breaking, that Hunter had been pulling down major bonuses for his work. SDCERA’s lawyers cite in the complaint that Amaranth was mismanaging itself on the way to destruction.
Hunter alone, upon information and belief, received a $100 million bonus for 2005!
I’ve never seen an exclamation point in a lawsuit like this before. Hey, I’m not complaining! Let’s read on! Wow!
The complaint implies that SDCERA was worried about the hedge fund’s investment exposure to natural gas commodities. But the pension fund’s staff and consultants — from the firm Rocaton — were set at ease by the hedge fund manager Nick Maounis.
In the Spring and Summer of 2006, defendants increased the Fund’s allocation to natural gas even after Maounis had personally assured Rocaton and SDCERA that the Fund was reducing its exposure to that market.
It’s an interesting document if you have the time to kill to read it. Let me know if you come across any specific tidbits of note.