December 9, 2023

Conn. Whistleblower lawsuit claims hedge fund squandered $2 billion

whistle-reflection-Article-201602111939By Christian Nolan, From The Connecticut Law Tribune

On one side is a Norwalk lawyer, whose client claims that a private equity firm mishandled nearly $2 billion in investor money. On the other side is the Washington, D.C.-based Carlyle Group, which emphatically denies the accusations, calling them “baseless and frivolous.”
At the center of the controversy is Nikhil Dhir, of Litchfield, who has compared his former employer’s actions to those of Enron, the Texas-based energy and commodities investment firm that became synonymous with corporate fraud at the beginning of the 21st century.
Securities and Federal Corporate Law
Dhir is suing the Carlyle Group in U.S. District Court in Connecticut. The former hedge fund manager claims that he was fired after he complained that executives allowed nearly $2 billion worth of investment funds, including teachers’ and firefighters’ pension accounts, to drain down to less than $50 million without telling the account administrators.
Such a firing of a whistleblower would violate the Sarbanes-Oxley Act, the 2002 federal law passed in the wake of corporate scandals at Enron and other giant companies.
“Often times, these kinds of Wall Street cases are filed in Manhattan,” said the plaintiff’s lawyer, Kristan Peters-Hamlin of Peters Hamlin LLC in Norwalk. “Usually we don’t get these kinds of cases here in Connecticut. How many two-billion-dollar loss cases do you have in Connecticut?”
Two of the firm’s hedge fund partners also reside in Connecticut, and the Carlyle group formerly had an office in Greenwich. The Carlyle Group has issued a statement characterizing the lawsuit as “frivolous” and the plaintiff as a “disgruntled” ex-employee. “Transparency, integrity and our fiduciary duty are the core of our commitment to our investors and we will vigorously defend ourselves,” said the statement. “These baseless and frivolous claims were filed by a disgruntled former employee.”
The statement goes on to say that the plaintiff first brought these claims to the U.S. Department of Labor and that the administrative action was dismissed with prejudice late last month.
Freight Futures
Dhir was hired in 2012 by Vermillion, a company founded in 2005 by Andrew Gilbert, of Greenwich, and Chris Nygaard, of Darien. Both executives and Vermillion are also named defendants in the lawsuit. According to the lawsuit, Dhir was hired as an energy portfolio manager for a Vermillion investment fund called the Viridian Fund. The fund was supposed to focus on trading physical commodities, derivatives and stock options in the metal, soft commodities, freight and energy industries.
Later in 2012, the Carlyle Group bought a 55 percent stake in Vermillion and Dhir became a Carlyle employee. Vermillion and Carlyle marketed the Viridian Fund to investors as a low-volatility diversified investment fund that would move less than one percent a day. It was also marketed that no more than 30 percent of the investment portfolio would be allocated to a single commodity.
In 2012, the fund invested in a freight position. It purchased freight futures, which are based on the price to lease a large cargo ship to carry dry bulk goods. As the cost to lease such a vessel increases, the value of the freight derivative will increase. The fund bought contracts that would make money if freight rates went up in the future and lose money if they went down.
Between 2012 and 2014, according to the lawsuit, the percentage of the fund that went to freight rose to over 90 percent. “This was therefore not a diversified investment fund as marketed and advertised, and it was a very high-risk investment,” Peters-Hamlin said in the complaint. “The partners of the fund consistently claimed both to the portfolio managers and to the investors that the position was liquid and could be exited with minimal market impact; however this was false.”
Peters-Hamlin said that by the fall of 2014, the investment was heading toward losses and a bleak future. “It was clearly in the investors’ best interests for the defendants to disinvest in freight in order to save investors from more serious losses,” wrote Peters-Hamlin.
However, the Carlyle Group and its fund partners continued to assure investors that freight was the right choice and to keep their money in the fund and await a market recovery. The lawsuit claims the partners offered this advice so they could continue to receive fees from investors who decided to keep their money in the fund.
“It was clear to plaintiff and some of the other portfolio managers that the defendants were not motivated by a desire to protect the investors’ capital because they maintained the freight position in the face of unacceptable losses and contradicting data,” the lawsuit states. “In fact, given the poor returns, the partners stated it would be better for them to ride the position to zero (meaning that there would be zero investor assets remaining), rather than admit that this trade had been incorrect, exit the trade and thereby lose investors and, as a consequence, the fees that investors paid to the fund’s partners.”
‘Enron Situation’
Things came to a head between the partners and portfolio managers. At a meeting, several of the portfolio managers, including Dhir, told the partners this was an “Enron situation.” Once again, according to the lawsuit, the defendants explained that it would be better for the fund co-owners to let the fund dwindle down to zero and not lose the fees, even if it hurt the fund’s customers.
Managers were reportedly told they would lose their jobs if they informed customers. The Carlyle partners continued to mislead investors on the phone about the risks, according to the lawsuit. Dhir continued to complain about their unethical behavior.
Because Dhir was responsible for managing a portfolio focused on energy investments and not freight, he continued to generate “handsome profits,” according to the lawsuit. In 2014 alone, his profits amounted to $11.5 million. As a result, he claims he was promised a bonus of nearly $1.3 million based on a formula that was negotiated in his contract.
At the same time though, the hedge fund partners were worried that they had a whistleblower on their hands with Dhir. The day before he was to receive his bonus, he was terminated for his perceived whistleblower activities, according to the complaint. “Tellingly, the other portfolio managers who complained also were terminated,” wrote Peters-Hamlin in the complaint. “In contrast, certain portfolio managers who had poor performance and lost money for defendants but who did not complain about their unethical conduct and defrauding of investors were retained.”
Dhir’s lawsuit alleges retaliation in violation of the Sarbanes-Oxley and Dodd-Frank Acts. The lawsuit also claims wrongful discharge, breach of contract and fraud. Dhir is seeking $100 million in punitive and compensatory damages.
The Carlyle Group has an office in New York City in addition to its Washington D.C., headquarters. The Greenwich office is no longer open.
Gilbert and Nygaard, the two Carlyle Group partners named in the lawsuit, were both terminated for malfeasance by the company in 2015. Chris Zuech, the former chief operating officer for Vermillion, now has a similar position with Carlyle Group. He is also a named defendant in the lawsuit.
The case has been assigned to U.S. District Court Judge Victor Bolden.
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