Ken Lipper Faces a Big-Time Payback

An appellate court agrees: The former hot-shot hedge-fund manager will have to fork over tens of millions to wronged investors

There's a saying that the rich just keep getting richer. But it doesn't seem to apply these days to Kenneth Lipper, the celebrity hedge-fund manager. On Nov. 13, a New York appellate court ordered Lipper to give back the millions in fees and bonuses he pocketed while running his $4 billion Lipper Convertible Bond Fund. The fund was shut down last year amid allegations of fraud and mismanagement after its managers admitted it had overstated its value by as much as 46%. In effect, the appellate court upheld a lower court ruling from last April that Lipper had appealed.

What will Lipper have to cough up? As much as $44 million -- the amount of fees and bonuses he and his top execs paid themselves over a six-year period. Plus, Lipper must allocate any negative balances in his investors' accounts to his own account. That could cost him additional millions. On top of that, investors have filed individual claims seeking to recoup the some $350 million that the hedge fund lost, according to Securities & Exchange documents, in January, 2002.

In yet another blow to Lipper, the appellate court also upheld the original order that he step down as the fund's liquidating trustee. He had already been replaced in that role but had appealed that as well.


  Lipper, a former New York City deputy mayor and Oscar-winning Hollywood producer, had a bevy of well-heeled and famous clients, among them actress Julia Roberts, former Federal Reserve Chairman Paul Volcker, Today host Matt Lauer, publishing and real-estate mogul Mort Zuckerman, and Senator Ernest "Frit" Hollings (D-S.C.). Lipper marketed his fund as a relatively safe investment and stated that 70% of it was invested in "investment grade" -- high-quality and less risky -- vehicles.

However, as BusinessWeek reported last year, more than half of the portfolio consisted of risky convertibles from companies like Global Crossing (GBLXQ ), WinStar, and other shaky companies, some of which eventually failed or went into bankruptcy (see BW Cover Story, 12/09/02, "The Fallen Financier").

A former portfolio manager for Lipper, Edward Strafaci, 45, was recently indicted by federal prosecutors on changes he overstated the value of the fund's assets. Strafaci's lawyer has said he will plead not guilty. Lipper himself has not been charged with any wrongdoing. A Lipper spokesman declined to comment on the appellate court decision.

By Marcia Vickers in New York

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