When a hedge fund's performance sours, you never know what to expect from limited partners, especially individuals.
One would hope that these investors had the smarts and resources to spread their hedge funds bets. If not, a fund manager could end up managing a significant portion of the investor's net worth. That's not a good situation to be in when the portfolio tanks.
There's clearly a whole of emotion behind the suit by Hugh Culverhouse, a former federal prosecutor, against hedge fund executive John Paulson. The plaintiff had invested several million dollars in the hedge fund in 2008, after Paulson came to prominence for his successful bets against securities backed by subprime mortgages.
According to the Financial Times, he redeemed what was left of his investment funds late last year. The crux of his suit is that Paulson failed to do proper due diligence regarding his disastrous investment in Sino-Forest. Had he done so, he would have known the company was a fraud, according to the suit.
On the surface, this sort of suit would not appear to stand a chance in court, but we are hardly legal experts. Paulson noted in a statement that the firm was given a clean bill by auditor Ernst & Young and was listed on the Toronto Stock Exchange. The suit suggests a deeper back story. Some investors may have demanded to be made whole on their portion of losses due to the investment, and Paulson couldn't say anything but no.
My guess is that the plaintiff would really like a settlement.
For more:
- here's the complaint
- here's the FT article
- here's a release
Related articles:
John Paulson faces his future
John Paulson owns up to mistakes
