April 29 (Bloomberg) -- D.B. Zwirn & Co.’s $2.5 billion in hedge-fund assets will be taken over by Fortress Investment Group LLC, the New York-based manager of about $29 billion, people familiar with the decision said.

Zwirn’s board and some of its biggest investors chose Fortress, a private equity and hedge-fund manager, to liquidate the assets. Fortress was picked from nine candidates, including a group headed by Irish financier Desmond Dermot, the people said. They asked not to be identified because the discussions are private.

Daniel Zwirn, 37, who runs the New York-based company, told investors in February 2008 he planned to wind down his flagship D.B. Zwirn Special Opportunities Fund LP. The fund makes loans to companies including those that have trouble getting financing elsewhere. Zwirn decided to close the fund when investors asked to withdraw more than $2 billion after a delay in the release of the fund’s 2006 financial audit. He told investors in the main fund in 2008 that they might have to wait as long as four years to get all their money back.

Fortress’s takeover would mark the end of Zwirn’s involvement with his seven-year-old firm, which managed $5.5 billion at its peak. Zwirn, who will be paid $1.95 million by the fund in deferred compensation from 2008, used $13 million of his own money to run the company since October, the people said.

Zwirn tried last year to start a fund called ZLC Global Investments that would use the same investment strategy as his Special Opportunities Fund.

Brian Maddox, Zwirn’s spokesman, and Lilly Donohue, a spokeswoman for Fortress, declined to comment.

Stock Rises

Fortress, which went public in February 2007, rose 18 cents, or 6.4 percent, to $2.99 in New York Stock Exchange composite trading. The stock has fallen 79 percent in the past year.

The transfer of assets to Fortress must be approved by a majority of investors. Fortress will keep Zwirn’s remaining employees, the people said.

Fortress, founded in 1998, will be reimbursed for costs of winding down the fund, plus 1 percent of the fund’s net assets, the people said. It also will get 5 percent of any profit it makes. Zwirn’s investors will pay more than $21 million in one- time fees associated with the liquidation of assets.

The fund also will set aside $15 million to pay any future claims or fines. The U.S. Securities and Exchange Commission started investigating the company after Zwirn told investors in early 2007 that an internal probe found improper financial transfers and expense accounting.

Audit

An independent auditor, PricewaterhouseCoopers LLP, took until December 2007 to sign off on the firm’s 2006 books. D.B. Zwirn has said it was the victim of misconduct by a former employee, and that an investigation showed that current management is above reproach. Clients were repaid with interest on any money they were owed because of the accounting irregularities.

Zwirn previously was a managing director and senior investment manager overseeing special opportunities for Highbridge Capital Management LLC. Earlier, he was a portfolio manager at MSD Capital LP, the money manager for Michael Dell, founder of Round Rock, Texas-based personal-computer maker Dell Inc.

To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net

Last Updated: April 29, 2009 17:05 EDT