The U.S. Securities and Exchange Commission has filed a civil complaint against a Ketchum- and San Francisco-based money management firm, alleging that the firm's managers mishandled tens of millions of dollars placed under its control by investors.
The SEC announced Thursday, Oct. 13, that it had filed an "emergency action" against Wood River Capital Management and its principal executive and primary shareholder, John H. Whittier, 38, of Hailey. Whittier is described as a former analyst for the investment firm of Donaldson, Lufkin & Jenrette who has also served as a money manager for individuals.
The complaint, which was filed in U.S. District Court in New York, specifically alleges that Whittier and Wood River Capital Management repeatedly made "material misrepresentations" regarding the oversight of two "hedge fund" partnerships managed by Whittier, Wood River Partners and Wood River Partners Offshore.
On Tuesday morning, Wood River Capital Management's Ketchum office on Leadville Avenue was closed and no business activity was apparent. Telephone messages left for Whittier at the office were not responded to.
The SEC complaint came only 10 days after a lawsuit was filed against Wood River Capital Management by financial services powerhouse Lehman Brothers. That suit, filed Oct. 3 in San Francisco Superior Court, asserts numerous allegations of misconduct by Wood River, including fraud. Lehman Brothers alleges that Wood River's actions cost it at least $8 million in losses.
Both lawsuits are linked to Wood River's business relationship with a California wireless-communications company called EndWave.
The SEC action alleges that from February 2003 to this month, investors placed tens of millions of dollars in the Wood River Partners hedge fund, amid promises that the fund would be broadly diversified and closely watched by an auditor.
Hedge funds are essentially loosely regulated investment pools that are usually set up as partnerships. For a fee, a general partner, the hedge fund manager, makes investment decisions for the investors, the limited partners. Generally, the funds involve large sums of money with no guaranteed return of capital.
Whittier did not have any audits conducted, the SEC said in a news release, and by July 2005, one stock, the common stock of EndWave, "accounted for more than 65 percent of Wood River Partners' claimed $265 million assets under management."
The investment in EndWave, the SEC said, "vastly exceeded" a 10 percent cap on individual holdings Wood River had said it would maintain.
"Wood River Partners purchased so many shares of EndWave stock that at one point the fund owned more than 45 percent of that issuer's outstanding shares," the SEC said. "But until last week, the defendants never disclosed the size of their position in EndWave."
In addition, the SEC alleges, Whittier during the past summer launched a new hedge fund, Wood River Partners Offshore, which by September also "had an overwhelming concentration" in EndWave. Whittier, the SEC states, also made misrepresentations about the diversification of the new fund.
In recent months, the value of EndWave stock dropped substantially. It reached a high of $54 in mid-July and last week traded below $13. As a result, the SEC said, the value of the two funds' assets has declined "significantly."
The Lehman Brothers suit alleges that Whittier requested that Lehman act as Wood River's agent to finance the transfer of 800,000 shares of End Wave stock at a cost of more than $20 million. But, Lehman's lawsuit claims, Wood River never paid for the transaction and it was forced to start selling the stock and incurred major losses.
The SEC is alleging Whittier and Wood River violated federal antifraud laws. It has asked for injunctions against future violations, that the defendants "disgorge any ill-gotten claims" and that the defendants pay civil penalties.