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Feds Reportedly `Wade In' As New Stream Capital Denies Problems

By Teri Buhl for HF-Implode.com

Teri Buhl is an investigative financial news reporter who has written for the New York Post, Trader Monthly, Housingwire, and Dealbreaker.

A Ridgefield, Connecticut-based hedge fund has come under the microscope of the FBI and is doing everything they can to make sure no one finds out about it.

Two ex-staffers at New Stream Capital, who have declined to be named out of fear of retribution, have recently been interviewed by the Bridgeport, Connecticut office of the FBI. People involved in the investigation say it is being led by Gary Dagan, Chief of the Economic Crimes Unit. During calls made to the FBI, Dagan declined to comment about the investigation.

The federal investigation is likely looking into two main issues: (1) did New Stream bring in US money without properly disclosing risk that they’d be subordinate to foreign investors, and (2) did they hold off writing down asset values in order to induce new investments, avoid redemptions and also earn higher management fees.

According to the fund's audited financial statements reviewed by a forensic accountant for Hedge Fund Implode, the managers’ fees increased from $3.8 million in 2007 to $9.3 million in 2008 while the net change to partners’ capital in the fund (that’s basically the fund's net income) went from a increase of $21.5 million to a huge decrease of $147.6 million over the same period.

When asked if there was a fee change for the managing partners, New Stream founder David Bryson told us, “With regards to fees, as a manager I have never earned anything beyond our .5% management fee and an incentive fee over a risk-free hurdle. Personally, I have re-invested a vast majority of the fees that I have earned -- and that capital is still in the fund today. Additionally, the managing partners of the fund have never taken a salary, additional fees, servicing fees or any other ‘hidden’ fees.”

But according to the fund’s 2007 audited financial statements that were presented in April 2008 and reviewed by Hedge Fund Implode, Note 9 states that the payment of a management fee is equal to .125% per quarter (.5% per annum) of the net asset value of each limited partner’s capital account through November 20, 2007. Then it states that effective December 1, 2007 the management fee will be equal to .113% per quarter (.45% per annum) of the total assets of the partnership.

So while the partners have never taken anything more than a ".5% fee", the question is .5% of what? The change in compensation definition all of a sudden now has the partners earning fees off the total AUM of the firm instead of the net equity of limited partners’ capital. And that whole "net" thing means they used to take a fee after write downs and losses were factored in, but now the managers just get to take a fee off of whatever they get their accountants to approve for total AUM.

New Stream Secured Capital LP was an $800 million fund in a historically secure-return alternative asset niche, that of high interest commercial bridge loans at premium rates (15-20%) and investments in life insurance settlements. At the end of 2008, the fund, which had booked consistent positive returns of around 12 percent a year from 2003-2007, abruptly ended up took a negative 25 percent loss for the year. The loss took US investors by surprise; because although they were told in December 2007 that the fund was going to be restructured so that all investors would share the same risk profile, which means they would be pari passu to the foreign investors who hold senior positions in the fund. Instead they learned this was not the case.

Investors had also been assured through last October that the fund was flying high and, according to an investor letter, earned positive returns of 7.98% YTD. As previously reported at Dealbreaker in June, we learned the fund gated redemptions and restructured itself while investors began legal action against the fund.

New Stream's investor base that holds senior positions includes European fund-of-funds investors like Gottex, Eden Rock, Pentagon Capital, and LGT Capital Partners. Some smaller institutional US investors held subordinate positions such as Silvercreek, TradeEX, Stonehaven, and Stratos Advisors. McKinsey & Co's pension fund is one of the larger US investors with at least $50 million invested. McKinsey would not comment on the size of their investment in New Stream.

Regarding the FBI investigation, Bryson said none of his current staff have been interviewed by the Bureau and that he is not aware of an investigation by any government agency. In fact, yesterday New Stream’s attorney at Reed Smith sent a letter trying to strong arm the research on this story saying the mere thought of publishing this news would be a total misrepresentation of the facts. But unfortunately for New Stream, just because they have not been interviewed does not mean they are not under investigation by the Feds. Some firms don't even find out until they are raided.

New Stream is no stranger to using heavy-handed legal pressure to strong arm anyone questioning their decisions.

After the Dealbreaker story was published spelling out why investors might want to oust the fund's management, New Stream sent out a letter on June 23 warning partners they’ve learned of two suits from off-shore investors and not to believe everything the media is printing. One of those is the well-known Swiss fund-of-funds Gottex, who according to sources in Gottex has around a $200 million investment in an off-shore feeder fund and is still pursuing legal action. Stratos Advisors, a US feeder fund investor, is still fighting over the civil fraud case in arbitration. Since the cases are ongoing, New Stream and Stratos would not comment on the nature of the legal action for this story.

In response to the suits, Bryson says, “The restructuring plan was passed with near-unanimous consent of the investors. Unfortunately, one or two investors who were unhappy with the restructuring plan have tried to use the courts and the media to force preferential treatment that would only come at the expense of the other investors in the fund. Understandably, we must challenge such requests and continue to work diligently to maximize value for investors despite such distractions.”

Certainly New Stream talks a tough game, and acts accordingly. Based on the many investors we interviewed for this story, more than a few sounded unsatisfied with the fund's management. In fact, Hedge Fund Implode has learned from two US investors in the fund that David Frank of StoneHaven Capital, who runs a small family fund, was threatened with arbitration by New Stream. Two investors who asked to remain anonymous for fear of similar retribution said, “A few other parties talked to David Frank this summer. We were unsatisfied with the way management was running the fund and we talked about pushing them out.”

According to a letter from the fund's attorneys at Reed Smith, New Stream was planning on taking legal action against Frank for defamation and tortuous interference in their business if he didn’t stop talking with other investors about the problems he saw. Threatening to sue an investor personally is a move rarely seen even in the street-fighting world of hedge funds. When reached for comment, Frank said he has settled his arbitration with New Stream and could not elaborate further.

We find it interesting that New Stream, whose assets according to Bryson now stand at $680 million, can’t speedily return investors’ money but has managed to save enough of their investors money for legal costs to fight anyone who doesn’t "stay in line".

And as most managers are now aware, once the FBI gets involved, shoving aside the toothless SEC, they don’t step down because investors ‘appear’ satisfied with the fund. Instead -- as we’ve seen with the recent developments at another fund everyone loves, SAC -- the feds focus on catching those who abuse the markets and don’t honor the intent of securities law.

We can't wait to see the results on this one.

Reference: New Stream 2008 to 2003 Information [PDF]

Writer’s Note:

When I first reported on New Stream for Dealbreaker six months ago, the fund never returned several of my calls for comment. Though yesterday, in a letter to investors reviewed by this publication, New Stream stated that it had never been given a chance to comment on the Dealbreaker story published in June and as a result it was a “victim of a media smear by a few investors”.

This week, New Stream’s lawyers at Reed Smith sent a letter to another publication interested in this story saying the fund had not been given a chance to discuss aspects of the FBI investigation and as a result I was not operating in good faith. This I find appalling given that I had spent hours talking to both the fund and its outside press representative on Monday and Tuesday of this week about exactly what would appear, including information regarding an FBI investigation.

I stand solidly behind the thoroughness of my research on this story. I spoke with more than two New Stream Investors along with ex-employees and multiple clients/borrowers of the fund, most of whom have asked to remained anonymous because of the agressive legal scare tactics they've seen the fund take. I reviewed two years worth of internal communications from New Stream, including investor letters, the fund’s financial statements, and a Power Point presentation about the fund’s restructuring. I continue to keep an open dialog with New Stream. Please check back for updates or additional comments from the fund. teribuhl@yahoo.com

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