Pirate may have a problem getting the Doubloon deal done. They filed on July 11, so they have some time to right the ship, pun intended.
September 29, 2006
Hedge Fund Shrinks Staff and Faces S.E.C. Inquiry
By JENNY ANDERSON
Pirate Capital, a hedge fund that takes pride in attacking management at underperforming companies, now finds itself under fire.
Pirate Capital, a $1.7 billion fund based in Norwalk, Conn., lost half its investment team this week, according to a letter from the founder and portfolio manager, Thomas Hudson. In addition, Pirate, an “activist” fund that pressures management to increase shareholder value, is being investigated by the Securities and Exchange Commission on suspicion of failing to alert the commission when it was selling stock, according to one person briefed on the inquiry.
Mr. Hudson’s letter, dated Sept. 28 and on stationery with a pirate ship logo, said that Pirate would close to new investors Sunday, to focus on delivering returns rather than collecting more money.
“I’ve decided to return the firm to its roots,” Mr. Hudson wrote. “The goal is to focus on returns and not the size of the assets we manage.”
Pirate Capital has had a difficult year: its flagship Jolly Roger Fund is up only 3.3 percent, while its activist fund is up 2.86 percent, according to materials sent to investors. Those returns are well below the average activist fund. Hedge Fund Research in Chicago tracks the returns of 44 funds that operate solely activist strategies; through August those funds have returned 10.39 percent.
An S.E.C. spokesman, John Nester, declined to comment. Isa Bolotin, head of investor relations at Pirate Capital, did not return calls seeking comment.
Pirate is known for its unusually brash tactics and unabashed style. A New York magazine cover article reported that Zachary George, 27, an analyst with the firm and former competitive snowboarder, told the chief executive of the Cornell Companies, a prison operator, that “You work for us,” and that Mr. George and Pirate wanted Cornell sold and the chief executive sacked. “Next year we’re going to be here, and you won’t,” Mr. George told the chief executive, according to the article.
Mr. Hudson said two investment professionals, including Mr. George, resigned on Monday. On Wednesday, Carl Klein, a portfolio manager, resigned, and Mr. Hudson asked two more analysts to leave. Five people, including Mr. Hudson, remain.
Pirate, which uses terms like “shipwrecks” and “treasures” in its investor letters, is considered rare for its openness to publicity.
Not all investors welcome that approach. “Any fund that promotes itself in the news indicates one of two things,” said Gordon C. Haave, director of investment and consulting at the Asset Services Company, a consulting firm. “That the fund manager is spending a lot more time worrying about his image in the community than about his investments, or two, that he is advertising to the rest of the world how everyone ought to copy his or her strategy.”
The result, he said, was more money flowing into activist funds and the prospect of too many people chasing the same returns.
According to documents provided to prospective investors, Pirate Capital was started in 2002 with $2 million by Thomas Hudson, who worked in the distressed-asset area at Goldman Sachs, and his wife, Gabrielle Katz Hudson, who was responsible for “legal transfer documentation for private assets” at Goldman. The same document says that Mr. Hudson sued Goldman Sachs for wrongful dismissal after being asked to leave the firm because of a “consensual extramarital affair with a co-worker.” That woman, according to the same document, became his wife, Gabrielle. The litigation, according to the document, was dismissed.
The S.E.C. is investigating whether Pirate was late in reporting to the commission material changes in its holdings. Investors with at least a 5 percent stake must report any changes to those holdings.
Some of Pirate’s top investments took a drubbing recently, after a significant rise at the end of August. For example, Cutter & Buck, the apparel company, traded from $9.40 up to $11.17 toward the end of August before falling back to $9.48 yesterday. Walter Industries, which Pirate owned 8.1 percent of at the end of August, rallied to $55.12 at the end of August and has fallen to $43.56. Strong month-end buying can reflect portfolio managers buying stock to push up prices. It is not clear what drove those two stocks.
Regulators are increasingly concerned about “clustered” trades, or copycat trades among hedge funds, according to two regulators.
Pirate has planned a call for Tuesday to address investor concerns.
nytimes.com |
