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The Fallen Financier

That wasn't all. Most fund managers use an independent third party to value--or "mark to market"--the seldom-traded securities every day. But the Lipper portfolio was rarely valued, and Strafaci and Visovsky did it on their own. "Few legit players do this themselves. It's almost a recipe for fraud," says the chairman of a respected money manager who also runs a convertible arbitrage fund. Biderman, along with another executive vice-president, Stephen Finkel, signed off on the valuations, according to Strafaci. Biderman claims many hedge funds mark their securities internally.

Biderman and Lipper had met in the Koch Administration, where Biderman was finance commissioner and later housing commissioner. Biderman was the closest to what the traders were doing, say insiders, but he had scant knowledge of convertible arbitrage. "It was the responsibility of Lipper, Biderman, and Finkel to have the fund officially audited. Abe and Steve, especially, were a very intimate part of the process," say Strafaci. Biderman says the funds were officially audited. (Strafaci told BusinessWeek that he and Visovsky were starting their own convertible arbitrage fund.)

Lipper's friends say the events of the early part of the year threw Lipper into deep distress and that he dropped out of circulation. He was rarely seen at favorite haunts, such as the Council on Foreign Relations or the white-shoe Century Assn. "Kenny has been through emotional hell," says an old friend. In the late summer, however, Lipper resurfaced, lunching with Koch at Midtown Manhattan's San Pietro--known, as one critic puts it, for its "noisy power lunch." Although Koch denies it, some speculate Lipper had met up with his old mentor for some career advice.

He may need it. Some investors want to remove him as the liquidating trustee of Lipper & Co. "How can someone who has possibly committed fraud and almost certainly breached his fiduciary duty act in the best interest of his investors?" asks one investor. Others are incensed that Lipper's distribution plan doesn't require him to give back any of the millions in performance fees, based on grossly inflated valuations, he collected for years. "He's paying himself for losing investors' money," says Mark Ressler, a lawyer for several investors. Other attorneys in the case say there's little doubt that investors will file damage suits against Lipper and possibly against PwC. Says PwC's Silber: "We see no reason why we should be sued."

Worse for Lipper is that his painstakingly crafted image may be irrevocably tarnished. As a broker in the movie Wall Street says, in a line Lipper might well have written: "We're all just one trade away from humility."

Read a Letter to the Editor about this story.

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