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Hedge Fund Accused Of Bogus Returns

Date: Wednesday, July 22, 2009
Author: Nathan Vardi, Forbes.com

NIR Group's redemption struggle with its investors features strong accusations.

A Long Island hedge fund known for making controversial deals in penny stocks continues to be accused by its investors of making up its returns.

The latest accusations against NIR Group's $770 million family of hedge funds, run from Roslyn, N.Y., by 38-year-old Corey Ribotsky, come from investor Steven Mizel, who in a lawsuit against Ribotsky and one of his funds claims they "appear to have provided investors with valuations of the Fund's securities which are wholly fanciful."

Redemption battles between hedge funds and their investors have raged during the credit crisis amid efforts by hedge funds to slow the outflow of cash. Big hedge fund firms like Cerberus Capital Management have imposed redemption restrictions, and some investor redemption efforts at firms like Highland Capital Management have become contentious and wound up in court (see Hedge Hell). But it has been rare for hedge fund investors trying to redeem money to accuse their fund managers of fabricating return numbers.

NIR Group has moved to try to get the lawsuit dismissed and claims Mizel is using the litigation in an effort to get around redemption provisions that Mizel agreed to when he originally made his investment.

Mizel and Palmetto Partners, who have been seeking to redeem their $1.7 million stake in NIR's AJW Qualified Partners since September, sued Ribotsky in New York state court in Mineola, N.Y., in March alleging breach of fiduciary duty and anticipatory breach of contract. In court papers filed in June, Mizel and Palmetto say "even sophisticated investors are entitled to recourse against something which has all of the indicia of a scam."

Ribotsky's main investment strategy has been to make private investments in public equity, known as PIPEs. In those deals Ribotsky invested cash in thinly traded public companies, in return for securities convertible into discounted common shares of the company. The result of a Ribotsky investment has often been that the company's stock plummets in value, but Ribotsky has continued to post excellent returns. In a note to investors last year, Ribotsky said one of his main funds was up 8.27% in the first nine months of 2008 and that NIR Group funds had experienced "little volatility and have had positive returns in 114 out of 117 months."

Nevertheless, in October Ribotsky told investors he was restructuring and halting redemptions in his funds. Court documents show Ribotsky gave his investors three options: Convert their holdings into a new fund with a three-year lock-up and no withdrawal rights; transfer their stakes into a new fund with the ability to redeem 12.5% of their investment per quarter; or remain in the dormant original fund with redemptions suspended.

Mizel, who has frequently filed and settled investor lawsuits, does not believe there was a good faith reason for the suspension of redemptions, claiming NIR was hit with few redemption requests, was not leveraged, and claimed positive returns. Mizel says Ribotsky suspended redemptions out of "fear that redemptions would expose (NIR's) inflated valuations of the Fund's assets." In addition, Mizel claims NIR has refused access to documents that would let him value the fund's assets independently but offered to get a third party to buy him out at a substantial discount.

In defense of his valuations, Ribotsky says they are put together by an independent valuation firm, WTAS, and his books are audited by Marcum and Kliegman. His legal work is done by Bingham McCutchen. In a statement NIR Group says Mizel's original investment agreement clearly provided for the suspension of redemptions and that the hedge fund has agreed to provide every document Mizel requested, subject to confidentiality, except for a confidential list of the fund's members.

"AJW vigorously denies the allegations in Mr. Mizel's complaint," NIR Group says in a statement. "Mr. Mizel's complaint is no more than a strike suit, seeking to obtain liquidity in spite of the terms to which he agreed permitting the fund to suspend redemptions."


This is the second lawsuit accusing NIR of bogus returns. In November another investor, Gerald Tucci, sued for fraud and questioned the accuracy of Ribotsky's returns, but not before Tucci allegedly sent two thugs to NIR's offices to try to collect his family's $1.5 million investment (see Rumble in Roslyn). The Tucci family denied knowledge of any such action.

In the Tucci case, Francis Tucci, one of Gerald Tucci's sons and a UBS investment banker, said in a legal filing that Ribotsky's positive return performance "simply makes no sense," and put together a spreadsheet of NIR's investments to back up his claim. Ribotsky dismissed the Tucci accusations as "baseless" and settled with the Tucci family earlier this year for undisclosed terms.