March 26 (Bloomberg) -- D.B. Zwirn & Co., a New York-based hedge-fund firm that manages $5 billion, is being investigated by U.S. regulators for improper money transfers and overcharging of clients under the firm's former chief financial officer.

The U.S. Securities and Exchange Commission told the company last week it would begin an investigation after D.B. Zwirn came to the agency with results of an internal review it began in October, the firm said in a letter to clients obtained by Bloomberg News. Perry Gruss, the finance chief, stepped down that month.

Gruss and executives working under him shifted money among three funds and managed accounts at D.B. Zwirn, and overcharged the portfolios by $12.2 million in the past three years. There was no evidence that other senior executives were aware of the money transfers, the internal review found. The firm, which spent $20 million to conduct the review, has since repaid clients with interest any money owed.

``The conduct identified by the independent review is completely unacceptable to us and deeply embarrassing,'' D.B. Zwirn wrote in the letter. The firm, led by Managing Partner Daniel Zwirn, said it's cooperating fully with the SEC.

SEC spokesman John Heine declined to comment. No contact information for Gruss could be found.

Addressing Problems

``The firm has made full restitution to its investors of the amounts involved and has strengthened its support infrastructure,'' said Steve Bruce, a spokesman for D.B. Zwirn.

D.B. Zwirn, which has doubled its assets from $2.5 billion at the end of 2004, said its rapid growth overwhelmed its accounting processes. The review found that the firm lacked consistent guidelines and training about costs that can be charged to the funds and accounts. It added new policies to prevent similar instances from recurring.

In one case, money was advanced to one fund by another and a separate account without proper documentation. As a consequence, the company's onshore fund owes its offshore fund and the separate account $100 million. In another, $3.5 million was moved from one fund to another, and then reversed, to reduce a performance gap between the two portfolios.

The company has since started training its workers on handling expenses, and updated its so-called whistleblower policy to allow employees to more easily report lapses in ethics. The firm also expanded staff that oversees accounting issues.

Warren Rudman Hired

Also, D.B. Zwirn hired lawyer Warren Rudman, former U.S. Senator from New Hampshire, as vice chairman of its international advisory board. He will help the firm on governance and compliance issues.

``D.B. Zwirn has overhauled its infrastructure and implemented rigorous processes and procedures consistent with industry best practices,'' Rudman said in a statement.

The company said the effect of the transfers on the funds' performance was ``not quantitatively material.'' After steps were taken to fix the problems, the returns on two funds declined by 1.1 and 0.2 percentage points, respectively, from Jan. 1, 2004, to Feb. 28, 2007. The third fund's returns were lifted by 0.7 percentage point.

D.B. Zwirn, which employs 220 people worldwide, has generated positive monthly returns on its funds for more than four years.

The company gained attention in September for firing a trader that had previously been terminated by Citigroup Inc. for inflating profits by $20 million to boost his bonus. David Becker pleaded guilty on Sept. 26 to one count of conspiracy to falsify bank records and to commit wire fraud while he oversaw commodities trading at the New York-based bank, which ended his employment in March 2004.

To contact the reporter on this story: Danielle Kost in Boston at dkost1@bloomberg.net.

Last Updated: March 26, 2007 18:40 EDT