Meriwether's Curious Deed

He transferred property to his wife during LTCM's fall

By all accounts, the last few days of August were hellish ones for John W. Meriwether and his beleaguered hedge fund, Long-Term Capital Management. In the midst of the marketplace slaughter that sent LTCM--and its creditors--to the brink of catastrophe, Meriwether still had time to attend to some family business. On Aug. 27, he signed an "interspousal transfer grant deed" transferring to his wife, Mimi, a 20-acre vacant lot on Del Ciervo Road in a tony residential area of Pebble Beach, Calif. It was, until that moment, the only property in his name.

Was John Meriwether seeking to improperly put a major personal asset out of reach of potential creditors--such as unhappy investors--who might sue him and LTCM as a result of the firm's fall? By that transaction and others years before, did he effectively insulate himself and other LTCM honchos from the consequences of their high-stakes bets?

These are troubling questions in light of the near failure of LTCM and the widely criticized $3.6 billion bailout. Lately, attention has focused on four LTCM principals who borrowed money to finance their investments in the fund. Yet another issue remains unanswered--what is the personal exposure of Meriwether and his 15 colleagues? Though the bailout left them with vast, as yet undisclosed personal losses and a 10% stake in the firm, their personal liability has been kept to a minimum. A BUSINESS WEEK examination of public records shows that, long before the Aug. 27 transfer, Meriwether had shielded his own and his partners' personal assets in the event LTCM ever got into trouble.

VIGOROUS DENIAL. A Meriwether spokesman vigorously denied the Aug. 27 property transfer was for asset-protection reasons. "That was done in implementation of estate planning that was under way for over a year," said LTCM spokesman Peter Rosenthal. "The implementation was begun, of this particular thing [the property transfer], a number of months earlier," he said. Why would it take "a number of months" to obtain Meriwether's signature on the bottom line of a simple, two-page property-transfer form? Said Rosenthal: "You got to get somebody to do it, you know, and he has other things to do every day."

Whatever the motivation, the effect of the transfer was to get the property out of reach of future creditors. The lot was transferred to Meriwether's wife as "her sole and separate property." Lawyers say that means creditors may be hard-pressed to seize that valuable property, even though California's community-property laws generally mean property owned by one spouse is the property of the other spouse.

To be sure, there has been no litigation. And Rosenthal insists the timing should in no way arouse suspicion, even though Meriwether acted at the tail end of the month that almost put LTCM out of commission. Still, the public record shows that if a lawsuit barrage begins, Meriwether wIll be ready.

LTCM itself was structured so that Meriwether and the other 15 principals have no liability beyond their own investment in the funds. Meriwether's colleagues, who include such top brains in finance as Nobel Laureate Myron S.

Scholes and former Federal Reserve Vice-Chairman David W. Mullins, have been widely described in the press as the "general partners" of LTCM. But, in a strictly legal sense, they are not.

According to public records, the LTCM is a Delaware limited partnership owned by another limited partnership called Long-Term Capital Holdings. Corporate filings show that the general partner of Long-Term Capital HoldinGs is yet another corporate entity, LTCM LLC. And a person familiar with LTCM says that LTCM LLC is, in turn, owned by the 16 principals--though not always in their own names. Some, he said, participate via their spouses and trusts.

Such complex corporate structures limiting top management's liability are a comparatively recent phenomenon among hedge funds, which were originally organized to give general partners personal liability if the funds went under. Still, hedge-fund lawyers note that such corporate structures often fail to shield managers when their investment vehicles run off the road.

CASH PURCHASE. But if LTCM's woes result in litigation, Meriwether has a second line of asset defense. While he may well have substantial liquid assets, he has none of the real property that creditors can easily track down and seize.

True, Meriwether lives on a widely publicized 68-acre estate in North Salem, N.Y. But land records show that it's not John Meriwether's estate at all, but rather Mimi Meriwether's estate. It was purchased for $2.7 million, apparently in cash, in January, 1994, just as LTCM was getting ready to open for business. The estate was purchased by his wife, and there is nothing in the public record to indicate whether John Meriwether was the source of the funds.

The Aug. 27 transfer may be problematic because it took place at a time when the fund was in hot water. Estate and asset-protection lawyers say it could well be construed in any future litigation as a fraudulent act intended to hinder creditors--which, they note, is a misdemeanor under California law. "It smacks of a fraudulent conveyance," observes L. David Burningham, a California attorney who specializes in estate planning and asset protection. But Burningham adds that he does not know the circumstances of the transfer, which would be justified if it serves a legitimate purpose, as Rosenthal insists.

If Meriwether's actions have shielded his assets, the same can't be said for all of his 15 other "partners." Some have substantial assets in their own names that could be reached by creditors in any future lawsuits. One who didn't appear to anticipate anything amiss at LTCM was Scholes, who purchased a $6.5 million house in San Francisco only this past July, on the brink of the LTCM disaster. Lawyers say that Scholes could have done a lot better job of structuring that purchase to protect that asset. Whatever his brilliance as an economist, Scholes may have a thing or two to learn about the finer points of asset protection. And John Meriwether would be an apt teacher.

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