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To: ild who wrote (219518)	2/7/2003 2:09:16 PM
From: ild	Read Replies (2) \| Respond to of 436258

Spitzer's Hedge-Fund Inquiry To Look at Credit Derivatives By HENNY SENDER Staff Reporter of THE WALL STREET JOURNAL New York State Attorney General Eliot Spitzer's investigation into hedge funds is now turning its spotlight on the little-understood market for credit derivatives. Mr. Spitzer's office is looking into whether Gotham Partners Management Co. took positions in this market to create the appearance that the companies on which it held bearish views "were in financial danger," according to people familiar with the matter. Gotham, of New York, declined to comment. The market at the heart of the inquiry is the credit-default swap market in which various players buy and sell protection against a possible default. The market is young and often a small transaction there can have a disproportionately large impact on prices. A rise in prices suggests to participants that the credit-worthiness of a company is deteriorating. The investigation is focused on whether Gotham acted improperly when it bought credit-derivative protection on Farmer Mac, an unrated but government-sponsored enterprise, and MBIA Inc., an Armonk, N.Y., bond-insurance firm. Gotham has said it bet that the price of protection would rise as other investors became nervous about the two firms' financial prospects, allowing Gotham eventually to close out its positions at a profit. Gotham isn't related to another hedge fund, Gotham Capital LLC. The new direction in Mr. Spitzer's examination comes at a time when hedge funds, which traditionally have been lightly regulated, are under increasing scrutiny. The Securities and Exchange Commission also is investigating the industry. Last week Pre-Paid Legal Services Inc. said it received a subpoena from the office of the U.S. attorney for the southern district of New York, in Manhattan, requesting data about trading in the Ada, Okla., concern's shares, and said the SEC has begun a preliminary civil inquiry into the same matter. Before Gotham started accumulating its positions, neither MBIA nor Farmer Mac, as the Federal Agricultural Mortgage Corp. is known, had been widely traded, suggesting that small trades would have a major impact on prices, dealers say. In the case of MBIA, the face value of Gotham's bet exceeded $1 billion, a massive position for a market in which $100 million is considered large. Gotham hasn't disclosed the value of its position in Farmer Mac credit-default swaps. In addition to buying that insurance, Gotham sold borrowed shares in both Farmer Mac and MBIA, betting that the price would fall, its managing partner, William Ackman has said. Gotham accompanied its research on Farmer Mac and MBIA with a note, declaring that it had substantial bearish positions on both. But because Gotham took its bearish positions before publishing research on the two companies, Mr. Spitzer's office also is looking into the possibility that Gotham was "front-running" its own research by anticipating that the price of Farmer Mac and MBIA securities would move after the reports appeared, according to these people. A spokesperson for Mr. Spitzer declined to comment. Last year, MBIA saw demand for protection go from about $5 million or $10 million a week to "hundreds of millions of dollars a week by October for us," said MBIA President Gary Dunton. "Our view is that the market is too illiquid to be meaningful," he says. For several weeks, Mr. Dunton adds, the firm indirectly sold protection on itself in an effort to keep the price from rising in a market sensitive to the sudden surge in demand. But when he became aware that the activity was primarily because of one hedge fund, MBIA withdrew from the market, Mr. Dunton says. The rise in the cost of protection on MBIA came against a backdrop of rising prices on many corporate names, including other triple-A rated firms. "The move came at a time when the market was in general disarray," says the head of credit derivatives at one major bank. "Everything was blowing out. I have never seen credit-default swaps prices to widen without cause."