KEY POINTS:
Investors in a collapsed hedge fund are demanding US$200 million ($274.5 million) in compensation from UBS, the fund's broker, claiming the Swiss financial giant was betting against its client using inside knowledge.
Idaho-based Wood River collapsed in 2005 after piling more than 80 per cent of its funds into one share - a technology company called Endwave - whose price quickly began to sink.
In a case that goes to the heart of the conflicts of interest that riddle Wall Street's largest financial institutions, UBS is alleged to have made more than US$100 million from short-selling of Endwave shares. Short-selling is the selling of borrowed shares, expecting to be able to buy them at a cheaper price at a later date.
Wood River's out-of-pocket investors say the bank knew that the hedge fund had amassed a dominant stake that it would have to sell. It knew this - the lawsuit says - because Wood River had told its investors that it would not put more than 10 per cent of its funds in a single stock. UBS said it would "vigorously defend" the suit.
John Whittier, Wood River's founder, was charged in February with fraud and failing to make proper disclosures to the stock market. At one point, the fund controlled more than 80 per cent of Endwave without the stock market being informed, which it should have done when the stake went over 10 per cent.
As well as being prime broker to Endwave's dominant shareholder, UBS was also a market maker in Endwave stock. It knew about and should have insisted upon the disclosure of Wood River's stake, the lawsuit alleges.
- INDEPENDENT
