Sep. 17–A former high-flying Connecticut hedge fund company that once purported to have $1 billion in assets has apparently scorched several well-heeled Texans including Dallas’ Morton H. Meyersonand other prominent investors for millions of dollars.
The Securities and Exchange Commission has sued the hedge fund company, Lancer Management Group, and its head, Michael Lauer of Greenwich, Conn., seeking fines and the return of investors’ money.
The SEC alleges that Lancer manipulated thinly traded “pink sheet” stocks companies that are too small or valued too low to be traded on the major stock exchanges. For example, Lancer is accused of artificially driving up the price of a company’s shares by buying virtually all its stock, then reporting that its holdings had grown in value based on the inflated prices it paid.
Mr. Lauer could not be reached for comment, but he is defending himself against the lawsuit.
More than 300 wealthy investors and institutions throughout the United States put money into a fund called Lancer Partners and two others under the Lancer Management umbrella. Mr. Meyerson, namesake of Dallas’ symphony center, and organizations he’s affiliated with invested at least $12.1 million, court documents show.
He was in good company: Other investors included the University of Montreal pension fund, Morgan Stanley and pop singer Britney Spears.
About a half-dozen Texans put money in the Lancer funds, but it’s difficult to know for sure because many invested under the names of trusts and partnerships.
Most of the jilted investors contacted, including representatives of Mr. Meyerson, were reluctant to comment.
But one investor, Roger Hill, an experienced San Antonio hedge fund manager, said Mr. Lauer had impressive credentials and counted among his friends some of the nation’s top money managers.
“He had a very credible appearance. He seemed to be friends with prominent people,” said Mr. Hill, head of the Travis Co. “He was reputed to speak six languages, and he told me he had dinner with George Soros [the legendary multibillionaire money manager] in a small dinner party.”
Institutional Investor magazine named Mr. Lauer one of the nation’s top investment advisers from 1987 to 1993. Many of Lancer’s Dallas investors were introduced to Mr. Lauer’s hedge funds by a local stockbroker.
In court filings, Mr. Lauer offered this response: “Although I have been accused of defrauding investors in hedge funds that I managed, I personally am by far the largest single investor, with the majority of my net worth in the funds, and I am therefore the most significant victim of the diminution in the funds’ asset value.”
Lancer Management’s apparent demise is yet another blow for the lightly regulated and secretive hedge fund industry, which has been on the SEC’s radar screen for about a year. Hedge funds don’t have to register with the SEC, and most hedge funds won’t reveal their trading strategies or stock holdings, citing fears that competitors will copy them.
Hedge fund managers use a variety of trading techniques usually prohibited by mutual funds, such as trading in options, borrowing money and selling short that is, betting that a stock will fall. Typically, only so-called accredited investors with a net worth of at least $1 million invest in hedge funds.
The risks are high, but so are the prospects of big returns.
“People in the hedge fund world are keeping an eye on this Lancer case because of the potential impact it could have if there is any regulation effort that comes out of this,” said a Lancer investor from Texas who asked not to be identified.
The SEC got a preliminary injunction in July from a federal judge in Miami to freeze the assets of Mr. Lauer, Lancer Partners and two other hedge funds, Lancer Offshore Inc. and OmniFund. Also, Lancer Partners has filed for protection under Chapter 11 of the federal bankruptcy code, and U.S. District Judge William Zloch has appointed a receiver to protect whatever assets remain in the three funds.
Mr. Lauer, in a motion in federal court to modify the injunction to freeze his assets, said his monthly living expenses were $93,541.
In its July request for an injunction, the SEC called the trading strategies of Lancer Management “a devious plot” in which the defendants pumped up the value of their stocks in virtually worthless companies to inflate the performances and the apparent value of the funds.
“This seemed to be a successful hedge fund, when in reality it was manipulated to get the results it was reporting,” said Christopher Martin, senior trial counsel for the SEC in Miami.
Mr. Hill, the San Antonio investor, said he had been investing with Mr. Lauer since January 1997 and had met with him many times over the years. He and other investors said they became suspicious that something was awry when they had trouble getting an audit of Lancer Partners last summer for fiscal 2001.
“He kept putting me off, so finally I decided that I would try to get out of the fund,” Mr. Hill said. “If I couldn’t get an audit, I didn’t want any part of it.”
He notified Lancer that he wanted his money back, but it never arrived, he said.
Because of the secretive nature of hedge funds, it’s rare to get a glimpse into their trading strategies or even their holdings.
“Hedge fund managers do everything they can to make sure you don’t know what they are doing,” said the Texas investor who asked not to be identified.
But SEC court filings and interviews with investors shed some light on the way this fund operated.
In 1993, Mr. Lauer formed a limited partnership in New York, which he eventually named Lancer Partners. In November 1997, the company was incorporated in Connecticut, and the money was pouring in. Mr. Lauer sold interests in this fund and two other funds to about 300 investors. From January 1995 to December 2002, investors contributed $195.6 million to Lancer Partners, according to a report filed by the court-appointed receiver.
During roughly that same period, investors in Lancer Offshore, which was available mainly to large institutions, contributed $906.3 million. In total, investors put $1.15 billion into the three funds and withdrew $537.3 million.
The receiver has documented only $3.5 million in cash remaining in the three funds, though that doesn’t include the value of the stocks, whose true worth would be difficult to determine.
The returns looked great, Mr. Hill said, at least on paper. In 1999, for example, his return was reported as 62.4 percent.
“I got audit reports that seemed to verify that,” he said. “But if all of the returns stem from what the SEC says, you don’t know what you have.”
The purported investment strategy of Lancer Partners and Lancer Offshore was to buy small and midsize companies. In a 1997 Business Week article, Mr. Lauer was quoted as saying that his strategy was “seeking out fallen angels,” or companies that Wall Street shunned.
Beginning in 2000, though, the SEC alleges that Lancer began trading in pink sheet stocks, which in many cases had no operations or earnings, though Lancer valued these stocks in the hundreds of millions of dollars.
The SEC alleges that Lancer was engaged in a practice called “marking the close,” with the objective of inflating the fund’s performance and net asset value.
Here’s how it worked: Lancer funds would buy 80 percent to 90 percent of all the shares of one of these small companies for a few cents a share. Then, on the last day of the year, Lancer would purchase another block of shares, effectively pushing the stock price higher.
For example, Lancer funds owned more than 44.9 million shares of a small company called Biometrics, most of which were bought for less than 10 cents a share.
Then, on Dec. 31, it purchased 12,000 more shares of Biometrics for a closing price of $5.50.
“Lancer Management dominated and controlled the market for Biometrics common stock … because Lancer orders comprised 100 percent of the total purchases,” according to the SEC complaint.
Lancer Management then valued the funds’ Biometrics shares at the $5.50 closing price, or $247 million, as of Dec. 31, 2002. The SEC detailed several of this type of transaction in its complaint.
“Oftentimes there was no other trading during the month in these companies except Lancer,” Mr. Martin of the SEC said.
Lancer Management received a 1 percent advisory fee and 1 percent expense fee to manage the funds and an annual incentive fee equal to 20 percent of the net profits, calculated as of the last business day of the fund’s fiscal year.
Mr. Hill and other investors hold out hope that they will recover some of their money.
“My feeling is that I don’t see how he [Mr. Lauer] could have had over $1 billion and depleted it,” Mr. Hill said. “I would hope that something of value can be recovered.”
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