Banyon Hedge Fund Lost $775 Million Invested With Rothstein

Banyon Investments LLC, a hedge fund in Fort Lauderdale, Florida, invested $775 million in the alleged $1.2 billion Ponzi scheme run by Scott Rothstein, bankruptcy court records show.

Banyon’s investments make it the largest creditor of Rothstein’s defunct law firm, which collapsed amid allegations he was running a Ponzi scheme, according to the list of 20 top creditors filed Dec. 2 in U.S. Bankruptcy Court in Fort Lauderdale.

Rothstein, 47, pleaded not guilty Dec. 1 to charges that he ran the alleged scheme since 2005. He sold investors stakes in fictitious legal settlements, prosecutors said.

A lawsuit against Rothstein by alleged victims names Banyon and its chief executive officer, George Levin, as defendants who knowingly participated in the scheme. Through Banyon funds, Levin invested as much as $75 million a month with Rothstein, buying more than $1.1 billion of legal settlements at a discounted $657 million even though he knew they were phony, according to the lawsuit, which was amended Nov. 25.

Banyon assets funneled to Rothstein “served as rocket fuel blasting the obscure investment vehicle to dizzying heights,” according to the lawsuit, brought by individual and institutional plaintiffs in state court in Fort Lauderdale.

Quarterly Audits

Banyon’s pitch to investors was that they were buying stakes in accounts that held payments already made from lawsuit settlements, which would be audited by a so-called Big Four firm quarterly, according to the lawsuit. It cited offering documents and testimony from one of the plaintiffs, D&L Partners of Broward County, Florida. Plaintiffs had sold their right to future payments to get money up front, the complaint said.

Levin has denied the allegations, said Jesse Derris, a spokesman. The hedge fund manager by contrast was a whistleblower, contacting the U.S. Attorney’s office on Nov. 1 to report “irregularities” after Rothstein failed to make a payment, he said.

Banyon’s goal was to buy from Rothstein “discount settlements and related periodic revenue stream from individual plaintiffs who have settled their labor and employment related lawsuits or claims and who would otherwise receive their settlement amounts over a period of time,” the complaint said.

The complaint cited an offering document for the Banyon Income Fund LP, which it said was created in May 2009 to serve as a feeder fund for Rothstein.

Previous Plea

Banyon’s chief operating officer was Frank J. Preve, who pleaded guilty in 1985 to bank embezzlement, according to the complaint. Preve was sentenced to 10 years probation and a $10,000 fine for falsifying loan documents as part of a scheme that led to losses of more than $2.3 million, according to the complaint, which names him as a defendant.

Preve wasn’t immediately available for comment yesterday, said a woman who answered the phone at Preve’s home in Carol Springs, Florida. She said she was the housekeeper.

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Hedge Funds Step Up Wall St. Talent Hunt

Less than a year after the credit crisis forced the closure of some 1,000 hedge funds, these firms are back out looking for capital and hiring professionals from Wall Street firms. In addition to poaching from investment banks, the funds are bringing in professionals from endowments, foundations, and traditional asset managers, according to a recent report.

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GAO Testifies on Hedge Funds

The GAO released testimony it presented before the Senate Subcommittee on Capital Markets on Hedge Funds: Overview of Regulatory Oversight, Counterparty Risks, and Investment Challenges GAO-09-677T,  May 07, 2009.  This testimony discusses:

(1) federal regulators’ oversight of hedge fund-related activities; (2) potential benefits, risks, and challenges pension plans face in investing in hedge funds; (3) the measures investors, creditors, and counterparties have taken to impose market discipline on hedge funds; and (4) the potential for systemic risk from hedge fund related activities. To do this work we relied upon our issued reports and updated data where possible.

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Ex-Broker Who Helped Dreier in Hedge Fund Scams Is Arrested

A broker who allegedly helped disgraced attorney Marc Dreier market millions of dollars in bogus promissory notes to hedge funds was arrested Monday night.

According to a criminal complaint unsealed Tuesday in the Southern District, Kosta Kovachev posed as the comptroller of the real estate developer Solow Realty when Dreier attempted to sell a New York City hedge fund $115 million in notes that purportedly were issued by Solow.

Kovachev, 57, was charged with a single count of conspiracy to commit wire fraud in violation of 18 U.S.C. §371. He was ordered held at his initial appearance before Magistrate Judge Frank Maas late Tuesday.

Meanwhile Tuesday, a panel of the Appellate Division, 1st Department, suspended Dreier from the practice of law, effective immediately, “on the basis of uncontroverted evidence of serious professional misconduct.”

There may be more charges to come in the Dreier case, as the criminal complaint states that Kovachev joined the conspiracy with Dreier and “others known and unknown.”

In 2006 and 2007, Dreier allegedly sold to a New York City hedge fund promissory notes with a face value of $115 million purportedly issued by Solow Realty.

But in 2008, when the notes were not repaid in time, a hedge fund employee sought reassurance from Dreier and asked to meet with representatives of the developer at Solow’s offices.

Dreier agreed and arranged a meeting at Solow for Oct. 15, 2008, without the knowledge of the real estate firm. At that meeting, the criminal complaint alleges, Kovachev pretended to be Solow’s comptroller and answered questions about the company’s finances.

Later that month, Kovachev, this time as himself, contacted the founder of another hedge fund for whom he had worked as a broker. Kovachev allegedly told the founder about the Solow notes and put him in touch with Dreier, who then sold the fund a $25 million note for the bargain price of $13 million.

Finally, when an employee of a third hedge fund wanted to speak with Solow’s chief executive officer in connection with the purchase of $100 million in notes, Kovachev got on the phone and impersonated the executive.

Federal officials said Solow was uninvolved in any of the transactions.

Dreier had access to the offices of Solow Realty because he had done extensive legal work for the company.

“The company never authorized Mr. Dreier to negotiate any financing or issue any promissory notes on its behalf,” a spokesman for Solow Realty said in a statement Tuesday.

The spokesman added that “as soon as the company learned that fraudulent and forged instruments purporting to be obligations of Solow Realty were circulating, the company reported the facts to the U.S. Attorney’s Office and we have been cooperating fully with the investigation.”

In the criminal complaint against Kovachev signed on Dec. 18 by Southern District Magistrate Judge Theodore Katz, Criminal Investigator Jordan Goodman of the Southern District U.S Attorney’s Office said he interviewed Solow’s chief executive, who assured him, “The developer did not issue any of the notes described above and has no note program.”

It was that same executive who told Goodman that the signatures appearing on the notes were forgeries. Financial statements provided by Dreier to the hedge fund, Goodman said in the complaint, “were entirely fabricated.”

Kovachev, the investigator said, had an electronic pass that gave him access to Dreier LLP and also had access to computers and offices at the law firm.

At Tuesday’s hearing before Magistrate Judge Mass, Southern District Assistant U.S. Attorney Jonathan Streeter convinced the court that Kovachev was a risk of flight and should be held until he can post a $300,000 personal recognizance bond guaranteed by three financially responsible parties and put up $100,000 in cash or property.

Magistrate Judge Maas said it was “a close call” but he was persuaded by two factors. The first was that Kovachev had traveled extensively to countries from where it would be more difficult to extradite him should he choose to flee. The second was Streeter’s statement that ” … we know from our investigation that Mr. Dreier paid people up to $100,00 to engage in impersonation in a single phone call.”

But Andrew Rendeiro of Flamhaft Levy Hirsch & Rendeiro in Brooklyn, who represents Kovachev, said he was confident his client could meet the bail conditions within a few days.

Rendeiro said, “Eventually, when the money trail is chased you will see hundreds of millions [went to] Mr. Dreier, 99.9 percent of it” and only a small percentage to his client.

Rendeiro said his client, the father of five, had already been linked to Dreier and, had he been prone to flee, would have done so in the immediate aftermath of Dreier’s arrest.

Kovachev lost his broker’s license in 2006 when he was implicated in a $28 million Ponzi scheme in which he and 11 others defrauded some 600 investors through the sale of unregistered securities structured as hotel timeshare rental interests. He was not criminally charged in the matter and denied any wrongdoing in a settlement with the Securities and Exchange Commission in which he paid $358,148 in disgorgement and penalties.

The New York Times reported in July 2004 that Dreier said Kovachev, then head of a dissolved Florida company called Evergence Capital Partners, was a client of his law firm. In a dispute between Solow Realty and developer Peter Kalikow, Solow and Dreier hired Evergence to place newspaper ads listing ex-creditors of Kalikow, the Times reported.

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