Institutional Investor's Alpha Magazine - November 2008 - (Page 32)

Daniel Zwirn F or Dan Zwirn, being a successful hedge fund manager was about more than money. It was also, some ex–DBZ employees say, about the power and prestige that accompanied the job. In addition to joining the leadership council of Robin Hood, Zwirn became a trustee of New York’s Public Theater, alongside Warren Spector (co-president of the Bear Stearns Cos. until his dismissal in August 2007) and MTV founder Robert Pittman, another DBZ investor. Around the time of the 2004 presidential election, Zwirn appeared to acquire an interest in politics. The names of such prominent politicians as former vice president Al Gore started to appear on his calendar. In March 2006, Zwirn appointed Samuel Berger, former national security adviser to Clinton, as chairman of DBZ’s newly formed international advisory board, which also includes ex-Senator Rudman and former Mexican president Ernesto Zedillo. “Just like Cerberus had former vice president Dan Quayle on its advisory board,” Zwirn notes, “DBZ has Warren Rudman, Ernesto Zedillo and other signiﬁcant political leaders who have helped the ﬁrm internationally.” Like many hedge fund managers of his day, Zwirn summered in the Hamptons and had his own personal driver. He traveled to more-far-ﬂung locales in his own “Unlike other funds, we are voluntarily winding down. It is not because we lost all of our investors’ money overnight.” — DAVID LEE, PRESIDENT, DBZ jet, purchased in 2005 to help the DBZ CEO oversee his growing empire. Still, Zwirn insists he isn’t avaricious (“I was raised better than that,” he asserts). Some investors say they liked the fact that Zwirn was motivated by doing deals and making money. By January 2006, DBZ had grown to nearly 200 employees, $5 billion in assets and some 600 positions. Despite this, Zwirn was signing off on all the deals himself. Investors say they were impressed with how well he knew all the positions in the portfolio, but Zwirn was spread thin. According to ex-employees, he refused to hire a CIO or appoint an investment committee to share the burden. Zwirn did later create investment review committees divided by region, which he says were meant to evolve into more-formal investment committees. In the ﬁrst week of October 2006, Zwirn informed employees, via a group meeting and conference call, that 32 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2008 some irregularities had been uncovered in the ﬁrm’s accounting by an internal controller at DBZ. There were three issues at the time: a wire transfer from the limited partnership to cover the down payment on the plane while DBZ waited for a loan to cover the cost; instances where fees had been taken from the fund after they had been earned but before they were supposed to be distributed; and the unauthorized transfer of assets between the onshore and offshore funds. On October 9, Zwirn announced that Gruss and the ﬁrm had parted ways. In fact, Gruss had left on September 30, after the hedge fund had brought in its outside counsel, New York law ﬁrm Schulte Roth & Zabel, to review the situation. (Gruss had okayed the wiring of funds for the down payment on the plane but did not originate the transaction.) Zwirn spent the weekend of October 28 on the phone with investors, explaining what had happened. He made almost 200 calls. Zwirn, an avid reader of Wall Street history, says he did not want to repeat the mistake John Meriwether and John Gutfreund made in 1991, as chronicled by Martin Mayer in Nightmare on Wall Street: Salomon Brothers and the Corruption of the Marketplace. Meriwether and Gutfreund, vice chairman and chairman, respectively, of Salomon, failed to adequately report illegal trading activities by one of their bond traders in the Treasury market, leading to sanctions against both men by the SEC. Zwirn retained a second law ﬁrm, Gibson, Dunn & Crutcher, to conduct an independent review of the fund’s operations. (Gibson Dunn hired accounting ﬁrm Deloitte & Touche to assist it.) Zwirn also reported its ﬁndings to the SEC, which opened its own investigation. And DBZ, which at its peak managed $6 billion in capital, soon stopped raising outside money. “I found Dan Zwirn totally mortiﬁed by what had happened,” says former senator Rudman, who joined the ﬁrm at the end of 2006. “Because one, there is no doubt in my mind Dan is an honest, ethical individual. And two, it was going to take a lot of money to straighten out what had happened, and that money would be his.” For the next year auditors and lawyers camped out in the DBZ ofﬁces. Numerous ﬁrm employees, and former employees, were interviewed by attorneys and auditors. Each of the deals on DBZ’s books was reviewed. Some investment professionals felt betrayed by the back ofﬁce. “There was this sense that we did our jobs,” explains one senior professional. “We were the hunters. We went out and sourced and originated and executed transactions like we were supposed to. And we got back to ﬁnd that the villagers had burnt down the town.” As DBZ was struggling, Fortress was showing how rich one could get running a hedge fund. On February 9, 2007, Fortress became the ﬁrst U.S. hedge fund ﬁrm to go public, raising $634 million in an IPO on the New York Stock Exchange, which valued the entire firm at more than $12 billion. Overnight Briger had achieved an estimated net worth of $2 billion. Although Fortress’s share

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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