Institutional Investor's Alpha Magazine - November 2008 - (Page 28)

Daniel Zwirn jet. Zwirn hired an independent law firm and forensic auditors to do a companywide review, which uncovered more accounting issues, including unauthorized transfers between funds and instances where the management company had overcharged the funds for operational expenses. He also notiﬁed the Securities and Exchange Commission, which began its own investigation. The use of customer funds to cover personal expenses could have been in violation of Section 206 — the antifraud provision — of the Investment Advisers Act of 1940. Zwirn, whose ﬁrm at its height had been bringing in more than $100 million a month in new capital, stopped taking money from investors in January 2007, as he waited for the review to be completed and the accountants to sign off on the books. But as the audit dragged on into the fall of 2007, investors grew impatient and redemption notices began to pile up. At the start of this year, with the audit ﬁnally completed and the review behind him, Zwirn still had hopes of keeping his ﬁrm together. In February, however, when a reporter acquired a conﬁdential letter from DBZ’s auditors and planned to go public with the story, Zwirn decided to embrace the inevitable; he announced that he was closing his ﬂagship, $4 billion D.B. Zwirn Special Opportunities Fund. Talk about bad timing. Zwirn found himself a forced seller of loans in a rapidly worsening credit crisis. It could take four years or more to wind down his fund. And the onetime wunderkind is now ﬁghting to have any future in the hedge fund industry at all. ﬁrm’s longtime auditor, PricewaterhouseCoopers, which didn’t sign off on the books until nine months after the independent review was completed. And, ﬁnally, at the credit crisis and the global recession, which have made a tough situation almost impossible. “This business is something I love very much. Having it suddenly damaged for no reason is sad,” laments Zwirn, who says the toll the situation has taken on him is both mental and monetary. Some who know him, however, believe that the hedge fund manager shares in the blame. To begin with, they say, Zwirn reached too far, too fast. He grew his ﬁrm from $900 million in January 2004 to $5 billion by the start of 2006. In the rush to do deals, they say, Zwirn would sign off on investments before he knew whether DBZ had the funds readily available to pay for them. He was also in a hurry to expand. By 2006, Zwirn had ten ofﬁces in Europe and Asia, putting even more pressure on DBZ’s already overextended back-ofﬁce and operational support. “From the ﬁrst minute I got there, it was, ‘Where are the deals? Where is the business? More, more, more,’” recalls one former DBZ investment professional. “Nothing was ever going to be big enough for Dan. We had to have growth. We were going to be a $10 billion fund.” Many former DBZ employees describe Zwirn as a demanding and difﬁcult boss. He wanted things done, and he wanted them done quickly. At the same time, they say, he insisted on signing off on every deal and every detail, down to the exact furnishings of DBZ’s Mayfair ofﬁces in London. Those who have worked with Zwirn remark on how, faced with adversity, even if it’s just a question he does not like, he typically shuts down and stares blankly into space. To his credit, Zwirn acted quickly when the accounting problems surfaced. In addition to commissioning the independent review and contacting the SEC, he appointed former New Hampshire senator Warren Rudman to DBZ’s international advisory board, giving him a large role in the review and repair process, which included remunerating investors for any money that had been improperly used. And Zwirn overhauled DBZ’s back ofﬁce, replacing 115 people. He believes he responded the best way he knew how under difﬁcult circumstances. “We self-detected, self-reported and self-remediated everything that the investigation found,” he says. “You have to act swiftly and aggressively, and over the top, when it comes to issues of integrity.” To be sure, Zwirn’s problems had little to do with investment performance. The Special Opportunities Fund was up 7.09 percent last year and had an average annual return of more than 10 percent from its May 2002 inception through December 2007. The fund, whose main strategy of lending to smaller companies beneﬁted from the easy-credit environment earlier this decade, delivered positive returns for an impressive 58 straight months before its streak was broken in August 2007. Winding down has been slow and costly. DBZ’s entire investment team is gone. Under the leadership of Law- “We met with Dan because Highbridge was backing him. They are a well-respected firm.” — TIMOTHY BERRY, PARTNER, PRIVATE ADVISORS “At 37, I would prefer not to retire,” says Zwirn. Well, good luck. The SEC is still investigating DBZ. One focus appears to be the plane and what Zwirn knew about the money transfers, according to ex–DBZ employees. And with more than 500 largely illiquid investments in 20 countries, no new cash coming in and little ability to hedge, what Zwirn calls “the orderly dissolution” of his ﬁrm — returning as much money as possible to investors — won’t be easy. Zwirn apparently assumes little blame for the series of events that caused his fund’s demise and seems quick to point ﬁngers: at the former CFO, Perry Gruss, whose actions, in Zwirn’s mind, started the troubles. At former COO Harold Kahn, who Zwirn feels failed to act as a proper check. At the disgruntled insiders who may have been the source of the leak to the press of the ﬁrm’s problems. At the 28 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - November 2008

Institutional Investor's Alpha Magazine - November 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Risk Rewarded The Good Guys: In the Here and Now Interview: Minister of Finance Cover Story: The Agony of Dan Zwirn Strategies: The Early Birds Are Awake Strategies: The Call of Shari’a Profile: Sweet Home Chicago Research Center: What Stampede? Alpha Bytes: Centralize the Data Unhedged: Commentary: Learning from the Wreckage

Institutional Investor's Alpha Magazine - November 2008

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