July 24 (Bloomberg) -- One of the founders of Gradient Capital Partners LLP lost a lawsuit seeking to recover a “gift” of about 3.9 million pounds ($6 million) paid to his former partner at the London hedge fund as losses mounted amid the financial crisis.
Ivor Farman gave the money to the fund’s co-founder Scott Pagel to help him pay a U.S. tax bill in January 2009, according to a U.K. court ruling today. Their relationship had soured the previous year as investors pulled as much as $900 million out of Gradient funds, Judge David Mackie said.
Gradient lost as much as 34 percent in 2008 because of its investments in illiquid Norwegian stocks, according to Mackie’s ruling. Hedge fund assets fell an average of 19 percent that year, and fund closures tripled to 1,471 as markets tumbled, according to data compiled by Hedge Fund Research Inc.
Farman was “making a gift recognizing that his trading has fallen short of his own very high standards and caused very large losses to his partner as well as himself,” Mackie said.
Pagel had sued Farman first for 5 million pounds over a loan and Farman’s withdrawals from the company, according to the ruling. That claim was dropped before the start of the trial and the case proceeded on Farman’s counter claim.
Farman, who no longer works at Gradient, said in a phone interview that he wanted to put the matter behind him.
“I was disappointed when he decided to use the proceeds of the gift to make this claim against me,” Farman said.
Pagel didn’t immediately respond to a phone call to Gradient in London. His lawyer, Duncan Bryden, declined to comment on the case. A man who answered the phone at Gradient declined to comment or give his name.
Farman argued the “gift” had been a mistake, Mackie said. The attempt to reconcile the relationship with Pagel “disintegrated almost as soon as it had begun.”
While the judge said Farman had “formidable intellect and self-confidence,” his evidence to the trial had been “overconfident and in some respects inaccurate.”
Farman and Pagel founded the fund in 2001, after previously working at Adelphi Capital LLP and Goldman Sachs Group Inc., according to the ruling. In 2006, Farman earned 59 million pounds and Pagel, who focused on marketing and investor relations, about 35 million pounds.
When the fund began losing money in 2008, Pagel blamed Farman, Mackie said.
“I have been monumentally wrong in my view for reasons I don’t understand,” Farman said in an e-mail cited in the ruling. By then they were working in separate offices and not speaking to each other, Mackie said.
“Today really is the tipping point for me,” Pagel said in a July 2008 e-mail to Farman cited in the ruling. “I simply have no capacity left for personal losses.”
Farman approved the payment in January 2009 after Pagel made repeated requests for help with his U.S. tax bill.
He resigned the same day, telling a colleague: “I am sick and tired of the stress and have no further desire to want to see us make a success of this,” according to the judgment.
The case is: Mr Scott Pagel v. Mr Ivor Farman, High Court of Justice, Queen’s Bench Division, Commercial Court, 11-433
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