Looking back at a Goldman grilling and a Paulson legal scare

April 19, 2011   Lawrence Delevingne

AR also revisits the Ivory-FrontPoint divorce and Ospraie’s Special Opportunities Fund.

One year ago

»» Goldman Sachs was grilled on Capitol Hill. Four former mortgage traders from the bank testified before the Senate’s Permanent Subcommittee on Investigations, where they faced tough questions for alleged conflicts of interest in selling mortgage-backed securities that later failed.

The same subcommittee, led by Michigan Democrat Carl Levin, released a 635-page report last week capping a two-year bipartisan inquiry into the matter. Among other subjects, the report examined how investment banks like Goldman Sachs and Deutsche Bank created and sold structured financial products that "foisted billions of dollars of losses on investors," while simultaneous profiting by betting against the mortgage market alongside such hedge funds as Paulson & Co.

»» John Paulson said Paulson & Co., not investors, would pay for any litigation resulting from potential charges related to the Securities and Exchange Commission’s fraud case against Goldman Sachs over a mortgage security product the hedge fund helped shape.

The issue turned out to be moot. Goldman settled with the SEC in July 2010 for $550 million without admitting or denying guilt. Goldman agreed to reform its business practices and acknowledged that its marketing materials contained incomplete information about Paulson’s involvement in shaping and then shorting the product. No suits were filed against Paulson. A spokesman for Paulson declined to comment.

Five years ago

»» FrontPoint Partners worked to fill the gap that opened when Ivory Investment Management left its platform. Ivory’s autonomy came at an awkward time for FrontPoint because of discussions with Morgan Stanley about a possible sale—Ivory, in Los Angeles, was managing more than $2 billion when it left, almost 30% of FrontPoint's assets.

Morgan Stanley did acquire FrontPoint in October 2006, at which time the platform consisted of 11 teams managing a combined $5.5 billion. The marriage would end in March 2011, when the majority of FrontPoint’s ownership was transferred back to its portfolio managers and senior management (Morgan Stanley retained minority ownership). FrontPoint stumbled in 2010 when it faced $3 billion in redemptions because of the massive government insider trading investigation. The firm was not charged with wrongdoing, but FrontPoint dismissed a portfolio manager, Joseph "Chip" Skowron III, and liquidated his healthcare funds when Skowron’s name surfaced in connection with the scandal (he was recently arrested by the FBI on insider trading charges after much speculation and intends to plead not guilty). FrontPoint, which now manages about $4 billion, declined to comment.

Ivory, still led by founder Curtis Macnguyen, manages $4 billion. The firm’s $2.7 billion Ivory Flagship Fund has produced a net annualized return of 10.3% since its November 1998 inception.

»» Ospraie Management launched a special opportunities fund. Run by Dwight Anderson and private-equity expert John Duryea, the Ospraie Special Opportunities Fund focused on the less liquid markets within the basic industry and commodity sectors.

Today, the private equity fund manages approximately $1.1 billion and has produced a total net return of 29.5% since inception. It peaked at $1.2 billion in 2007 and 2008 (the slight decline from then is because of distributions, according to a source close to the firm). Still run by Anderson and Duryea, the fund is best known for its investment in Gavilon, the commodity trading and merchandising division of ConAgra Foods, which it bought in 2008 with other investors for approximately $2.1 billion. A spokesman for Ospraie declined to comment.

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