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Recent Cases: Hedge fund investor recovers $4.3 million invested in multi-strategy hedge funds |
In December 2012, the team of Dovin Malkin & Ficken and Vernon Healy won a $4.3 million arbitration award against GenSpring Family Offices, a money management firm owned by SunTrust Bank, which offers investment advise and money management services to high net worth clients. At the arbitration hearing, the Claimant showed that GenSpring had developed a strategic model whereby it advised the Claimant -- a Florida entrepreneur with a $30 million portfolio -- that he should invest 30% of his account in Multi-Strategy Hedge Funds ("MSHFs") instead of traditional bonds. According to GenSpring, these MSHFs had a "risk profile similar to bonds" but with a higher return. In reality, the MSHFs that GenSpring was touting were "Funds of Funds", that is they invested in other hedge funds, each with its own managers, many of whom were employing investment strategies that were largely far riskier than even equity investments. Moreover, these MSHFs suffered from a severe lack of transparency and thus, GenSpring did not even know what strategies all of the managers and sub-managers were following and had no reasonable basis for representing that the MSHFs were a low-risk "substitute for bonds." As a result, in 2008 when the stock market plummeted, the MSHFs lost a large portion of their value -- similar to the equity markets -- while traditional bonds went up 5%. In the end, GenSpring's clients' accounts were totally exposed to high risk investments during the worst financial crisis in modern history because they had no traditional low risk bond investments to diversify their accounts. Tellingly, in March 2009, GenSpring re-classified the MSHFs as "Growth" investments like equities, instead of "Defensive" investments like traditional bonds, as they had previously been classified. "It's clear that GenSpring's statements were misleading and inaccurate," said securities attorney Ed Dovin, whose firm previously won a $1.3 million arbitration award for another GenSpring client. "Prior to the 2008 financial crisis, GenSpring was representing the MSHFs as a 'substitute for bonds', claiming that they had the same risk as bonds but with higher returns. After its clients suffered devastating losses using its untested and ill-conceived strategy, it corrected itself by acknowledging that these MSHFs actually had the same or higher risk than equities." Moreover, "it appears this was a systemic approach that GenSpring used with virtually all of its clients as a means of attracting business by distinguishing itself from the other investment firms which used more time-tested approaches to investing," added Allison Ficken, Mr. Dovin's partner. |
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