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The sweet deal that turned sour for anaesthetist

Date: Tuesday, December 8, 2009
Author: Vanda Carson and Scott Rochfort, The Sydney Morning Herald

BABCOCK & BROWN'S foremost private investor is suing the founder of B&B's hedge fund spin-off, Everest Capital, saying he was misled into putting $25 million into one of its unit funds.

Formerly Babcock's staunchest of allies - worth hundreds of millions at the height of the firm's boom years - Joe Ross, an anaesthetist of Dover Heights, says he was duped by Everest and its chief executive, Jeremy Reid, into doubling his stake in an investment fund to $50 million.

Dr Ross says he only agreed to put in a second $25 million in October 2007 because Mr Reid promised him that he would readily be able to redeem his units in the Everest Babcock & Brown Income Fund, and would not have to wait in a queue or be subject to a redemption freezes like other investors.

He says this special deal was contained in a ''side letter'' agreement with Mr Reid that was made in September 2007, just days before he injected the extra $25 million.

Other unitholders were never told of this deal, Dr Ross says.

Like most investors in the funds managed by Everest, Dr Ross borrowed heavily. In May this year he received a $20.5 million margin call from BT Securities.

Mr Ross's company went to redeem its investment in September last year when financial markets were in meltdown following the collapse of Lehman Brothers.

Mr Reid initially told Dr Ross that he could redeem about $15 million worth of units in the first week of October last year, but later withdrew the offer.

Had Dr Ross been paid out then, he would have soaked up all the liquid assets of the fund, leaving other unitholders empty-handed. This would have exposed Everest to claims of misleading conduct under the ASIC Act.

Dr Ross says Everest should not have promised him he could redeem above other unitholders because the fund first needed to get unitholder approval to allow such a special deal.

''Everest should have qualified their representations that it may not be able to give [LJK, Dr Ross's company] preferential rights because it would need to be fair to all unitholders,'' Dr Ross's claim says.

In the past year LJK and other unitholders have only been able to redeem 53c for every $1 invested.

The fund suspended redemptions in October last year before Everest started winding it up in January.

In a statement to the market last week Everest said Dr Ross's claim was ''without merit and will be vigorously defended''.

The fund manager was worth close to $1 billion at the peak of the boom. Its share price has crumbled from $3.60 to 6c.

Dr Ross has lost $12.4 million of his investment.