Institutional Investor's Alpha Magazine - November 2008 - (Page 33)

price has since taken a beating because of the credit crisis and the global market meltdown (its total capitalization has shrunk to $1 billion), watching Fortress’s initial success had to be difﬁcult for Zwirn. DBZ had been in talks with Lehman Brothers in 2006 about going public. Gibson Dunn completed its review of DBZ in March 2007. The news was as good as Zwirn could have been hoping for. The ﬁrm found that most of the accounting errors had already been disclosed, none had been large in monetary terms and every possible step had been taken to make investors whole. “The bottom line is, DBZ did not have a valuation problem,” notes Rudman. The extent of DBZ’s operational problems was apparent in the account of the review DBZ gave its investors in a letter on March 26, 2007. In addition to the earlier accounting issues, Gibson Dunn discovered instances when investor money had been taken to cover capital calls for “an investment partnership owned personally by three [unidentiﬁed] senior professionals associated with the ﬁrm,” according to the letter. (The lawyers found no evidence the senior professionals knew fund assets had been used.) It also discovered that the management company had overcharged the funds by more than $11 million for expenses, as well as an instance in 2006 where $3.5 million in expenses was shifted between the onshore and offshore funds. The audit dragged on for almost a year, in part because PricewaterhouseCoopers couldn’t fully start its work until Gibson Dunn had completed its review. According to ex– DBZ employees, it didn’t help that PWC had to go through all the details of every deal and every transaction, some of which were difﬁcult to get. By the time PWC signed off on the 2006 audit, on December 24, 2007, many DBZ investors had ﬁled redemption requests. Although the auditors uncovered nothing new, the damage had been done. “What wrecked Dan Zwirn’s business was not what happened with the accounting,” says one investor. “It was that he could not get his K-1s out to people.” The Internal Revenue Service requires partnerships and trusts to provide K-1 reports to investors, detailing proﬁts and losses. Without them, investors could not close their own books; therefore they put in for redemptions. “We would still have been very much in business if the audit had been done in a timely fashion,” Zwirn insists. Going into the crisis, Zwirn had been in negotiations with Gruss; Christopher Suan, who was responsible for nonU.S. investments; and Vasan Kesavan, head of direct lending. Zwirn had decided to make Gruss and Kesavan partners (Suan already was one), but hashing out the exact terms had been difﬁcult. Ex–DBZ employees say Zwirn seemed to view the management company as his own: In 2006 he took a $6.5 million distribution for the deposit on the RitzCarlton apartment. (Zwirn and his wife never moved into the apartment; he sold it a year later, along with the plane.) By early February 2007, Kahn had resigned from DBZ and been replaced by Cutler as COO. Later that month http://www.autobahn.db.com http://www.autobahn.db.com

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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