September 15, 2009: The trustees of the New York State Teamsters Conference Pension and Retirement Fund filed a lawsuit Sept. 10 against Ivy Asset Management Corp., alleging Ivy breached its fiduciary duties by investing in a hedge fund that was “heavily involved” in the “reckless manipulation” of natural gas futures (Bulgaro v. Ivy Asset Management Corp., N.D.N.Y., No. 5:09-cv-1027, lawsuit filed 9/10/09).
The trustees allege that the Teamsters fund lost every penny of its nearly $5.5 million that Ivy invested in a hedge fund run by Amaranth Partners L.L.C. According to the complaint filed in the U.S. District Court for the Northern District of New York, Amaranth collapsed in September 2006 after it was unable to maintain its “dangerously large and highly leveraged position” in the natural gas market.
The Teamsters fund trustees determined in 2002 that they wanted a portion of the fund's overall asset allocation to be invested in hedge funds. According to the complaint, the trustees recognized that investment in hedge funds required sophisticated investment management skills. They eventually decided to invest in Maplewood Associates, which was a hedge fund managed by Ivy.
According to the trustees' lawsuit, Ivy made a written promise that it would serve as an investment manager for the fund. By investing in Maplewood, the Teamsters fund became a limited partner of Maplewood. The complaint alleges that Maplewood Associates is run by Maplewood Partnership, a New York investment limited partnership that pools its limited partners' capital contributions in order to have its assets managed by a number of independent investment managers.
The complaint further alleges that Ivy managed the Teamsters fund's assets through Maplewood Partnership and that Ivy, acting as investment manager and fiduciary of the Teamsters fund, caused the Maplewood partnership to invest in Amaranth International Ltd.
Investment in Amaranth
According to the complaint, Amaranth International is a Bermuda mutual fund company that invested substantially all of its capital in Amaranth Partners. The complaint asserts that Amaranth Partners held itself out as a multi-strategy hedge fund that invested in several different markets, but by 2005 was heavily involved in a “wholly inappropriate, speculative and reckless manipulation of natural gas futures with billions of dollars in borrowed money.”
Amaranth Partners collapsed in September 2006 after it was unable to maintain its “dangerously large and highly leveraged position” in the natural gas market. The complaint alleges that the Teamsters fund lost its entire $5.5 million investment with Amaranth Partners.
In their lawsuit, the Teamsters fund trustees allege that Ivy was a fiduciary under the Employee Retirement Income Security Act and breached its duties by failing to divest the Teamsters fund of its investment in Amaranth Partners.
The complaint alleges that Ivy knew or should have known that Amaranth was not a prudent investment as Amaranth's success was dependent upon highly-leveraged, unsustainable and enormous bets made on volatile natural gas futures.
“Ivy knew that Amaranth was not investing as Amaranth had promised, yet Ivy did not pull the Teamsters' investment out of Amaranth. Instead of disposing of the investment in Amaranth and investing in a fund that was investing appropriately, Ivy asked Amaranth to start investing as Amaranth had promised and hoped that Amaranth would. However, Amaranth then made even more bets in the same energy sector and in even larger amounts. The later inevitable collapse of Amaranth meant the loss of all the Teamster Fund assets invested in Amaranth,” the trustees said in the complaint.
The trustees have requested in their lawsuit that the court order Ivy to restore and make good to the fund for losses that resulted from Ivy's breach of its fiduciary duties.
The trustees are represented by Thomas G. Moukawsher of Moukawsher & Walsh, Hartford, Conn.; Jules L. Smith of Blitman & King, Rochester, N.Y.; and Ronald Dean of Pacific Palisades, Calif.