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Hedge Fund Steel Partners Sued for Fraud

Date: Thursday, January 15, 2009
Author: Svea Herbst-Bayliss, Thomson Reuters.com

Activist hedge fund firm Steel Partners is being sued by Bank of America and ACF Industries on charges that the company committed fraud by not telling investors it was considering going public, according to court documents.

Steel Partners is trying to turn its largest portfolio into a publicly traded partnership Previous Reuters Story.

Bank of America and ACF claim in the documents that investors were not given notice of the plans or an opportunity to vote on the proposal, stripping them of their interest in the fund. The lawsuit was filed in Delaware Chancery Court on Tuesday [Jan. 13], and Reuters obtained a copy on Wednesday [Jan. 14].

Bank of America, acting as master trustee for ACF Industries' employee benefits plan, charged in the lawsuit that Steel Partners and its manager, Warren Lichtenstein, "pulled off a classic 'bait and switch' by stripping investors of what they had purchased and replacing it with something entirely different."

ACF, which manufactures railcars and railcar components, and which, according to the documents, is affiliated with billionaire investor Carl Icahn, invested $15 million in 2005 with Steel Partners Offshore Fund Ltd, which became Steel Partners II (Offshore) Ltd.

Bank of American referred calls to attorney Keith Schaitkin at Icahn Associates, who referred Reuters to the court documents.

According to those court documents, while Mr. Lichtenstein had promised to invest in cheaply valued small companies and put no more than 25% of the fund's assets into illiquid investments and special situations, he acknowledged in December that things had changed.

According to the lawsuit, 38% of Steel's investors demanded their money back late last year, but Steel Partners suspended redemptions.

The lawsuit said that instead of selling assets to raise cash to meet clients' demands to get their money back, Mr. Lichtenstein considered turning the portfolio into a public company to deal with withdrawal notices.

By Svea Herbst-Bayliss