On the morning of Jan. 14, 2002, the Park Avenue offices of Oscar-winning money manager Kenneth Lipper were uncannily quiet. It was 9:30, the start of the trading day, but the fund manager and the research director who ran Lipper & Co.'s $2.8 billion hedge fund, Lipper Convertibles LP, were nowhere to be seen. Their desks, which stood just a few feet from Lipper's own expansive, glass-walled office, were curiously neat. Gone were the usual scribbled notes, crumpled papers, and half-filled coffee cups. A phone emitted a constant, low-pitched buzz. The two men had turned up early that morning, resigned, and left abruptly--without any explanation. Lipper, a former New York deputy mayor, was out of the office too that day, working in Hollywood on a film he was producing and meeting with some of his hedge-fund clients.
Abraham Biderman, executive vice-president at the firm and Lipper's right-hand man, was alarmed. Why had the traders, Edward Strafaci and Michael Visovsky, jumped ship? He knew that Lipper & Co.'s longtime auditor, PricewaterhouseCoopers, was planning its annual audit soon and would be questioning "the boys," as several co-workers called them, about trades they had made. Biderman was also aware that Strafaci and Visovsky had pocketed their annual bonuses just days before. Biderman started to panic. Soon, his worst fears were confirmed:
Strafaci and Visovsky had left behind a trail of unanswered questions about a securities portfolio that was in tatters.
It wasn't until a month later that Lipper dropped the bomb on his investors, many of them his famous and powerful friends from the worlds of entertainment, politics, and Wall Street--such as actor Julia Roberts, Walt Disney (DIS ) CEO Michael D. Eisner, Senator Ernest F. "Fritz" Hollings (D-S.C.), the family of financier Henry Kravis, and publishing and real estate tycoon Mortimer Zuckerman. In a Feb. 20 letter to investors, Lipper disclosed that Lipper Convertibles had lost "in the neighborhood of 40%" of its value, or about $315 million, in 2001, instead of the 7.7% gain the firm had reported near the end of the year. The hit to Lipper's $4 billion empire of money, hedge, and mutual funds was so serious that it would eventually force the 16-year-old firm under.
Lipper & Co. is now liquidating all of its hedge funds and mutual funds. It has also sold its $500 million high-yield-bond business because of the debacle. The firm has acknowledged that it is being investigated by the Securities & Exchange Commission. Sources say that the FBI is also conducting an inquiry. If the government pursues a case, Lipper could be charged with failure to supervise his traders or even with fraud--and if he is found liable, it could cost him his career in the securities industry. If criminal charges are upheld, he could possibly land in jail, say sources close to the SEC probe.
Ken Lipper's fall epitomizes a tumultuous chapter on Wall Street. He was a creature of the times--at home in the "greed is good" precincts of Wall Street and comfortable running with a fast Hollywood and Manhattan crowd. The ruddy-complexioned, fuzzy-haired Lipper may be best known to some as an adviser on Oliver Stone's 1987 movie Wall Street. But he has also carefully crafted the image of a Renaissance man with the Midas touch. Lipper has flitted, almost Zelig-like, through the worlds of investment banking, politics, money management, movie production, philanthropy, and book publishing. In the mid-'80s, he was Edward I. Koch's deputy mayor. In 1999, he even won an Academy Award for The Last Days, a documentary about the Holocaust that he produced with Steven Spielberg.
The flashy pitchman with his fancy connections and wealth was a magnet for investors who never questioned his ability to manage their money. According to one investor: "He would say, `You're investing alongside me and my family."' Recalls another: "I was told repeatedly that the fund was like a `high-powered' savings account." The Hollywood crowd, especially, trusted Lipper, a former partner at both Lehman Brothers Inc. (LEH ) and Salomon Brothers (C ). Says an insider: "These were rich--but largely financially ignorant--people who were wowed by his blue-chip Wall Street credentials."
They should have taken a closer look. Documents obtained by BusinessWeek show that Lipper Convertibles, an arbitrage fund set up to buy the convertible bonds of companies and simultaneously sell their stock short as a hedge, was marketed as a conservative investment. But it held a large number of highly speculative securities and was heavily leveraged. Described in the prospectus as a "market-neutral" fund that aimed to make money whether the stock market rose or fell, it wasn't hedged properly. What's more, although auditors PwC signed off on its accounts, Lipper & Co. had probably been mispricing the fund as far back as 1995, according to an Oct. 3 internal report by accountants BDO Seidman LLP. Nevertheless, Steven Silber, a PwC spokesman, says the firm does not comment on client matters. (Lipper & Co. is not related to the fund research company Lipper Inc., which is part of Reuters Group PLC. (RTRSY ))
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By Marcia Vickers