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Wood River Capital Management - Equities

2005-10

Count of distinct funds: 1
Capital base: $265
Loss: ?

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stories: hedgefund.net, typepad.com, thestreet.com, businessweek.com

This narrative contributed by Ann Logue.

In October of 2005, Lehman Brothers sued Wood River Capital Management, a hedge fund that claimed to have a diversified investment style. The fund owed Lehman $20 million. It turned out 68% of the fund’s assets were in a single stock, EndWave Communications, which declined in price. This was despite the fact that Wood River’s marketing materials promised investors that the fund would hold a variety of securities, and even though the fund’s management had never filed statements with the Securities and Exchange Commission showing that it owned 45% of EndWave. (Any shareholder with more than a 5% stake in a company must notify the Securities and Exchange Commission.)

Wood River’s investors had three warning signs that things were less than perfect. The first was that in 2002, the landlord of its San Francisco office sued the company for non-payment of rent. The second is that the fund’s executives had never presented audited financial statements, despite saying that they would - and despite that being a good practice. Third, Wood River claimed in its offering memorandum that its audit firm was American Express Tax and Business Services. A phone call to that company would have revealed that it does not provide business audit services for hedge funds or anyone else.

Update, Oct 17, 2007:

Whittier is going to jail and will pay back $5.5 million.

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Important: This fund is on our list of hedge funds that have "imploded" (see also ailing lenders). However, please note that "imploded" is a somewhat subjective. The "imploded" list contains hedge funds (or other unregulated and autonomous speculative investment funds) which have gone through some sort of permanent adverse change. This is a somewhat subjective call, and does not necessarily mean total shutdown or bankruptcy. It can also mean steep and rapid mark-downs in net asset value; or abnormal "bail-out" by corporate parents or peers in order to avoid write-downs and provide liquidity. The funds are of any type and sector.