Magnum Funds: The Hapless Victim, Four Times Over

by: Greg Newton

The "Specialists" in identifying leading hedge funds were bitten…again.

Rather than giving Magnum its cut of fees, [Pirate Capital LLC founder Tom] Hudson expelled the investors that the Bahamas firm had brought to Pirate, Magnum President David Friedland says. “It got pretty ugly,” Friedland says. “If we'd known this was the kind of character he had, we wouldn’t have invested.”

But questionable character assessment is a core competency at the Friedland Magnum Funds Factory. The company’s past features intimate relations with such pillars of probity as Princeton Economics’ Martin Armstrong, Lancer’s Michael Lauer, and Jack Barry’s Beacon Hill Asset Mgt LLC, a trio who between them relieved investors of well over $1 billion, some – probably small – fraction contributed by Magnum’s investors.

The firm’s latest tumble into the due diligence fence was disclosed Friday, in a Bloomberg piece focused on the personal and professional legal entanglements of the loud, but lately lackluster, Tom Hudson, principal cut-throat at Pirate, the activist hedge fund manager.

...Magnum Global Investments Ltd has sued Pirate in New York State Supreme Court, saying Hudson reneged on a promise to pay the investment firm in return for steering investor dollars Pirate's way. Hudson has asked the judge to dismiss the case...[In 2004, Hudson] struck a deal with Magnum in which the Bahamas firm invested $2 million in Pirate and steered $28 million from other investors to Hudson's fund in exchange for a 20 percent cut of all fees on those assets, according to Magnum.

Mutiny at Pirate Capital Roils Hudson After Worst Year Ever
By Anthony Effinger and Katherine Burton
Bloomberg Feb 2. 2007

But while Hudson stands accused of nothing more remarkable than getting a few bets wrong, and, in the words of, being a jerk, Magnum has a long record of putting its investors in harm’s way:

1. Princeton Economics’ Martin Armstrong is still rotting in New York’s Metropolitan Correctional Center according to the Bureau of Prisons, more than seven years after being jailed on civil contempt charges for declining to provide details of where he stashed the remnants of as much as $1 billion of mostly Japanese investors’ capital, and six months after pleading guilty to a related securities fraud charge.

Magnum opened a fund based on Armstrong’s investment model in mid-1998; a year later, the Commodity Futures Trading Commission pulled the plug on Princeton Economics’ operations, alleging the concealment of “substantial trading losses.” Republic New York Securities – which had since been taken over by HSBC - paid over $600 million for its role in documenting and distributing the fraudulent net asset value calculation in a 2001 settlement with the CFTC and the US Securities and Exchange Commission.

2. In what history would later show to be an inglorious twofer, the Magnum Hedge Fund Reporter, in its Dec 98-Mar 99 edition named Armstrong as the winner of its third ‘Fund Manager of the Year’ award, while the same issue’s lead story roared ‘Lancer Voyager Rated Top-Performing Smaller Companies Fund for ’98 – Now up 212% in First 26 Months.’

Magnum Hedge Fund Reporter No. 12

Lauer’s fund complex eventually collapsed in 2003, costing its investors as much as $600 million. A recent filing in the long-running US Securities and Exchange Commission action against Lauer detailed, among “material facts as to which there is no genuine issue to be tried,” valuation overstatements showing that Lauer’s fraud was in progress at least as early as 1999 (see Page 27).

3. Between those incidents, Magnum had been caught by the fraud involving Jack Barry’s Beacon Hill Asset Mgt LLC, which took its investors for a $300 million ride by cooking the valuation of its portfolios holdings. Barry and several other Beacon Hill executives skated on civil fraud charges by paying $2.4 million, as fee disgorgement and prejudgment interest, along with $2 million in penalties in what appears to have been one of the more kindly assessments handed out by the SEC in recent years.

Curiously, neither Lauer nor the Beacon Hill Gang have yet faced criminal charges as a result of their activities. And, for the elimination of doubt, Magnum’s only role in these events has been that of hapless victim. Four times.

Noted with interest I: The penultimate paragraph of an article on ‘Global Macro Investing’ by Dion (Dad of David) Friedland, chairman, Magnum Funds, ends with the following quote:

It is becoming increasingly obvious around the world that economic or investment analysis can no longer be conducted on a purely domestic basis. The speed with which capital is capable of moving means that any economy can be disrupted by international capital flows due to external considerations.

And who uttered those fine phrases? Well, that would be Dion’s old buddy, Marty Armstrong. But read it quick. These things have a way of disappearing into the electronic ether.

Noted with interest II: David Friedland’s other job is president of the Hedge Fund Association. Founder: Dion Friedland. Executive director: Lara Block (sister of David). NakedShorts recommends the site’s public message boards for its dozens of informed and on-topic posts. If your topics are, among others, Canadian pharmaceuticals, replica watches and an appropriately diversified range of recreational activities.