March 30 (Bloomberg) -- Amaranth Advisors LLC was sued by the San Diego County retirement fund for securities fraud, a step the hedge-fund firm said may delay refunds to clients hurt when it collapsed under $6.6 billion in losses in September.

Amaranth lied about trading strategies and made ``excessively risky and volatile investments,'' according to a complaint filed yesterday by the San Diego County Employees Retirement Association. Amaranth said fighting the lawsuit, the first tied to the largest-ever hedge-fund failure, will drain remaining assets earmarked for investors.

The complaint, filed in U.S. District Court in New York, seeks damages of at least $150 million based on the retirement plan's $175 million investment two years ago. Amaranth has yet to refund $630 million, or about 23 percent, of the assets it held as of September 30, Nicholas Maounis, founder of the Greenwich, Connecticut-based firm, told clients in a letter yesterday.

``Many of you may find it unfair that a single investor could hold up further distributions of cash and impose the material costs of a lawsuit on all others,'' Maounis, 43, wrote. The San Diego fund is ``the only investor to have commenced, or even threatened, legal action,'' according to the letter.

The retirement fund has received $60 million from Amaranth's liquidation and expects another $15 million, Brian White, its chief executive officer, said in an interview yesterday. The pension fund sued after negotiations to get more money back failed, he said.

`Single Strategy'

The San Diego fund accuses Amaranth of defrauding clients by misrepresenting itself as a fund that invested in many different assets, according to the complaint.

``The fund, against its own espoused investment policies, effectively operated as a single-strategy natural-gas fund that took very large and highly leveraged gambles and recklessly failed to apply even basic risk-management techniques and controls,'' the complaint says.

It names as defendants Maounis, as well as Amaranth Chief Operating Officer Charles Winkler, former energy trader Brian Hunter and Robert Jones, chief risk officer.

The complaint alleges that Amaranth traders and managers ``recklessly ignored'' risk-management controls as they built up concentrated positions in natural-gas futures. As those investments grew, Amaranth told investors it was decreasing allocations to energy trades, according to the complaint.

Attorneys representing the San Diego fund are William McSherry and Steven Greenblatt with Crowell & Moring LLP in New York, according to the filing. Greenblatt declined to comment today.

WorldCom Investor Lawyer

In October, San Diego fund executives hired Sean Coffey of New York-based law firm Bernstein Litowitz Berger & Grossman LLP, who helped WorldCom Inc. investors win $6.1 billion in the second-largest securities fraud recovery. San Diego retirement executives said Coffey would help the fund determine how it could recover losses from its Amaranth investment.

``We were retained to evaluate various legal options available,'' Coffey said today in an interview. ``We completed that assignment.'' He didn't file any Amaranth-related lawsuit and is no longer working with the San Diego fund. He declined to comment on yesterday's lawsuit.

Amaranth's assets peaked at $9.5 billion in August as rising prices increased the value of its holdings. The wagers by 32-year-old Hunter were upended by an unexpected decline in early September. Clients also included funds run by Goldman Sachs Group Inc., Morgan Stanley and Bank of New York Co.

Hunter Funds

Hunter is raising money for new funds to invest in commodities, according to documents sent to potential investors. He will be a portfolio manager for a firm named Solengo Capital Advisors based in Greenwich and Calgary. Hunter, who's from Canada, spent much of his time with Amaranth in Calgary.

Amaranth allowed Hunter, a trader ``with a known history of taking excessive risk in volatile markets, to trade remotely from Canada and to take enormous, highly leveraged and unhedged positions that endangered the investors' investments,'' San Diego says in its complaint.

The lawsuit is ``meritless litigation that will inevitably reduce its own recovery and, potentially, the recovery of other investors,'' David Boies of Boies, Schiller & Flexner LLP in New York, an attorney representing Amaranth, said in an e-mailed statement.

Waive Claims

Clients who hold about 10 percent of the fund have proposed that Amaranth be released from all potential legal claims to speed the return of their money, according to a memo sent to Amaranth by investors and obtained March 23 by Bloomberg News. The letter, dated March 22, didn't disclose the group's members. It said the plan would probably lower legal costs for investors and the hedge fund.

``Each investor would be given a choice whether (A) to release potential litigation claims against the funds and all parties indemnified by the funds, which should facilitate accelerated distributions of cash, or (B) to preserve their ability to pursue potential litigation claims'' while setting aside reserves to cover legal costs, according to the letter from unnamed investors.

`Blueprint' for Others

Maounis's letter to clients yesterday asked investors who had not expressed an opinion about that proposal to ``let us know your preliminary (and non-binding) thoughts on the matter.''

San Diego's complaint may encourage other investors to sue Amaranth, said Seth Berenzweig, a lawyer with Arlington, Virginia-based Albo & Oblon, whose clients include institutional investors. He is not involved in the lawsuit.

``If several of these cases pop up and one investor wins, it can serve as a blueprint for showing how to strike back against hedge funds,'' Berenzweig said.

Securities cases have a heavy burden of proof, he said. Investors ``must show that the firm engaged in fraud and malfeasance, with direct evidence establishing more than just that someone could have done a better job with a risky investment.''

The case is San Diego County Employees Retirement Association v. Nicholas Maounis, Charles Winkler, Robert Jones, Brian Hunter and Amaranth Advisors LLC, 07-CV-2618, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net.

Last Updated: March 30, 2007 13:56 EDT