Zwirn to Shut Largest Hedge Funds After Clients Pull $2 Billion

Zwirn to Shut Largest Hedge Funds After Clients Pull $2 Billion

Feb. 22 (Bloomberg) -- D.B. Zwirn & Co., the New York-based investment firm that was hobbled by disclosures of improper accounting, will liquidate its two largest hedge funds after clients asked to withdraw more than $2 billion.

The firm will shut the domestic and offshore versions of the Special Opportunities Fund after its 2006 financial audit was delayed, leading to ``a large number of investor redemptions,'' according to a letter sent yesterday to clients. The funds have about $4 billion in assets, 80 percent of the firm's total.

The company, started by Daniel Zwirn in October 2001, expects to tell investors in March how it will return their money, according to the letter, a copy of which was obtained by Bloomberg News. It may take as many as four years to wind down the funds, whose holdings include hard-to-sell private-equity investments and derivatives based on the underlying value of debt securities.

The hedge-fund manager told investors in early 2007 that an internal investigation had found improper financial transfers and accounting of expenses. Its independent auditor, PricewaterhouseCoopers LLP, took until December to sign off on its books, according to a copy of a Dec. 3 audit obtained by Bloomberg News.

By that time, clients had asked to withdraw $482 million, according to the audit.

D.B. Zwirn was ``the unfortunate victim of misconduct by certain former employees,'' according to an e-mailed statement from spokesman Shawn Pattison. Accounting issues were ``thoroughly investigated'' and current managers of the firm were ``found to be above reproach,'' the statement said, without naming the former employees.

Internal Investigation

The firm plans to continue managing about $1 billion in assets outside of the funds it's closing, according to the letter.

D.B. Zwirn's former finance chief stepped down in October 2006, the month the firm started the investigation into accounting practices including its calculation of client fees and transfers among funds, according to a March 2007 letter to investors. The internal investigation prompted a probe by the U.S. Securities and Exchange Commission.

That inquiry was continuing when the PricewaterhouseCoopers audit was completed, according to the December report.

The Special Opportunities funds gained 15.6 percent in 2006, according to the December audit. That compared with the 12.9 percent average return of hedge funds globally, according to Chicago-based Hedge Fund Research Inc.

Trader Dismissed

D.B. Zwirn drew attention in 2006 after it fired a trader previously terminated by Citigroup Inc. for inflating profits by $20 million to boost his bonus. The trader, David Becker, pleaded guilty in September 2006 to one count of conspiracy to falsify bank records and to commit wire fraud while he oversaw commodities trading at the New York-based bank, which ended his employment in March 2004.

Daniel Zwirn previously was a managing director and senior investment manager overseeing special opportunities for Highbridge Capital Management LLC, the $29 billion hedge-fund affiliate of New York-based JPMorgan Chase & Co. Zwirn continued as a senior investment adviser to Highbridge after the firm contributed money to the founding of his company.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.

BLOOMBERG