Aeneas Hedge Fund Faces Probes in U.S and Malaysia

Date: Monday, September 18, 2006
Author: Otis Bilodeau and Katherine Burton, Bloomberg.com

(Bloomberg) -- Aeneas Capital Management LP, the hedge fund company run by former SAC Capital Advisors LLC money manager Thomas Grossman, is under investigation by regulators in the U.S. and Malaysia after bets on Malaysian stocks caused losses of about 60 percent in one of its funds, people familiar with the situation said.

The U.S. Securities and Exchange Commission is examining Aeneas to determine whether it broke any securities laws, three people with direct knowledge of the inquiry said. In Kuala Lumpur, Aeneas is being probed for potential stock manipulation, said the people, who declined to be identified because the investigations aren't yet public.

Aeneas, which managed as much as $400 million and invested mostly in emerging markets, highlights the risks of funds that make concentrated bets and don't have to make routine disclosures with regulators. More than 500 hedge funds have shut in the past two years, according to data compiled by Chicago-based Hedge Fund Research Inc. Altogether, they've caused less disruption to global markets than the collapse of Greenwich, Connecticut-based Long-Term Capital Management LP in 1998.

Malaysia's market regulator, the Securities Commission, said in an e-mailed response to questions that its investigations into ``the manipulation of certain shares are ongoing and individuals acquainted with the facts of the cases have been called in to assist.'' The e-mail didn't name Aeneas and officials there declined to comment further.

``The SC will take the necessary action where there is evidence of deliberate conduct or attempt to interfere with the genuine forces of supply and demand,'' the commission said.

Losing Bets

Aeneas lost money in stocks including Iris Corp. and Farm's Best Bhd., prompting Deutsche Bank AG to demand repayment of loans that financed the trades, said the people familiar with the firm's situation. Grossman told investors on an Aug. 14 conference call about the losses in its Priam fund, which also hurt the larger Aeneas Portfolio fund, said two people with direct knowledge of that discussion.

Neither Grossman nor any of his employees has been accused of wrongdoing. Grossman didn't reply to a request for comment and his firm referred questions to attorney Kenneth Breen, a partner at Fulbright & Jaworski in New York. Breen declined to make Grossman available for an interview.

``Aeneas is cooperating fully with securities regulators,'' Breen said.

SEC spokesman John Nester declined to comment.

Malaysia Exchange

Bursa Malaysia, manager of the country's stock exchange, ``continuously monitors and reviews the trading activities of market participants and will take necessary actions, if required,'' Chief Regulatory Officer Devanesan Evanson said in an e-mailed statement. He wasn't specific about any cases that are under investigation.

Hedge funds are private pools of capital that allow managers to participate substantially in the gains on money invested by clients. An SEC rule that tightened oversight of the $1.2 trillion industry was struck down by a federal appeals court in June, leaving the agency without the power to conduct random inspections of many funds.

Grossman, 40, formed Aeneas in 2000 after leaving SAC Capital, Steven Cohen's $10 billion hedge fund company in Stamford, Connecticut. He worked at New York-based Goldman Sachs Group Inc., the world's top trading firm by revenue, following his graduation in 1988 from Lehigh University in Bethlehem, Pennsylvania, where he played fullback on the football team.

Grossman's Fund Performance

At SAC Capital, Grossman managed an international equities fund from 1997 through 1999, posting annual returns of 39 percent, 27 percent and 59 percent, after fees, according to performance figures obtained by Bloomberg News. SAC Capital invested with Grossman when he started Aeneas and redeemed its money about a year later.

Aeneas Portfolio, Grossman's flagship fund, made money for investors in five of the past six years. It had a negative return of almost 16 percent in 2001. The fund's best year was in 2004, when it gained 22 percent after fees.

Performance figures weren't available for Priam, the Malaysia-only fund that suffered losses of 60 percent. A person familiar with the situation said the fund has no capital left.

Aeneas was among the largest investors in at least four Malaysian stocks that more than doubled this year, according to filings with the Kuala Lumpur Stock Exchange. Priam and Aeneas Portfolio amassed stakes of more than 10 percent in Iris and Farm's Best, as well as Kosmo Technology Industrial Bhd. and MoBif Bhd., the filings show.

Trading Curbs

Shares of all four companies collapsed after regulators began probing the rapid appreciation in their shares.

Iris, a Kuala Lumpur-based electronics maker, gained more than 270 percent this year after the funds run by Grossman acquired almost 20 percent of the company's shares in February and then continued buying. The stock exchange imposed trading curbs in May on Iris shares and last month said it was ``very concerned'' that the stock's ``trading patterns were inconsistent'' with movements in the broader market.

``I have no idea'' about any investigation, Iris Managing Director Tan Say Jim said today in a telephone interview. Any manipulation of Iris's stock ``has nothing to do with the company or its management,'' he said.

Stock Plunge

Shares of Iris have dropped 81 percent since the exchange tightened rules on trading. Grossman's Priam fund still held Iris shares as of Sept. 14, filings show. His Aeneas Portfolio fund sold 5 million shares on Aug. 23.

By mid-July, Priam and Aeneas Portfolio held almost half of the outstanding shares of Melaka, Malaysia-based Farm's Best, which sells poultry products and animal feed. The stock has since dropped more than 70 percent, following an Aug. 17 letter from Malaysian regulators that faulted the company for selling a stake to unidentified private investors at ``far below the market price.''

The two funds bought up 46 percent of the outstanding shares of MoBif, an Internet security company in Penang, Malaysia, from February through June. During that period, the stock rose more than 80 percent. In August, the Malaysian exchange issued a statement questioning the ``sharp increase in price and high volume'' of trading in the stock. The shares are down 83 percent from their high on Aug. 16.

Loans Called

Frankfurt-based Deutsche Bank, Germany's largest bank, in August called the loans Aeneas used to increase the size of its trading bets, the two people familiar with his conference call said. Rohini Pragasam, a Deutsche Bank spokeswoman in New York, declined to comment.

The SEC is investigating whether Grossman's firm improperly shifted assets or liabilities between its accounts, the three people familiar with the agency's inquiry said.

Trading records at the Kuala Lumpur exchange show Priam and Aeneas Portfolio were active in the same stocks on the same days. In one instance, Aeneas Portfolio fund sold 12 million shares in Mahajaya Bhd. on Dec. 30, 2005. The same day, Priam, the Malaysia-only fund, acquired 12 million shares of the company, a Kuala Lumpur-based real estate developer.

Investors continue to pour money into hedge funds. Hedge Fund Research estimates that the industry attracted $42.1 billion from April through June, the most in a quarter since at least 2003. At the same time, returns are dwindling. In July, they declined for a third straight month, the longest losing streak since September 2001.

This year, MotherRock LP, Saranac Capital Management LP and a fund run by Ospraie Management LLC shut after making unprofitable bets on commodities and convertible bonds.

To contact the reporters on this story: Otis Bilodeau in Washington at obilodeau@bloomberg.net ; Katherine Burton in New York at kburton@bloomberg.net .