Ritchie Multi-Strategy hedge fund investors file involuntary Chapter 11 case, seek answers from manager

By Caroline Salls

Pittsburgh, Dec. 27 - An involuntary Chapter 11 bankruptcy case was filed Wednesday in the U.S. Bankruptcy Court for the Northern District of Illinois by investors in Ritchie Multi-Strategy Global, LLC, a domestic hedge fund managed by Ritchie Capital Management, according to a news release.

Petitioning creditors Benchmark Plus Partners, LLC, Benchmark Plus Institutional Partners, LLC and Sterling Low Volatility Fund QP have asked the court for approval to investigate allegations of mismanagement, self-dealing and fraud.

In addition, the release said the petitioning creditors, who hold a total of $46.08 million in claims against the hedge fund, filed the bankruptcy case to investigate whether Ritchie Capital Management violated federal law, engaged in self-dealing transactions and breached its management agreement with the hedge fund as the manager.

According to the release, Ritchie Multi-Strategy appears to be in the final stages of liquidation.

Hedge fund investors were advised in September 2006 that redemption of investments would be delayed indefinitely while Ritchie Capital Management worked to wind down and sell the hedge fund's portfolio.

A group of the largest investors, including the petitioning creditors, formed an investor committee to monitor the wind down of the hedge fund and an offshore hedge fund that is also managed by Ritchie Capital Management.

In April 2007, Ritchie Capital Management sold much of the funds' combined portfolio to Reservoir Capital Partners affiliate Rhone Holdings II, Ltd.

The funds were left with cash and a purchase price account receivable from Rhone, and Ritchie Capital Management continues to manage the portfolio sold to Rhone, the release said.

Investigation background

The release said the investors committee consented to the Rhone transaction, and it requested detailed information about Ritchie Capital Management's dealings with the funds after the sale was complete.

"RCM's management of the portfolio for Rhone and, at the same time, its obligation to enforce the funds' rights against Rhone and the portfolio, including with respect to the purchase price account receivable, creates an inherent and actual conflict of interest," investors' counsel Jeff Marwil of Winston & Strawn LLP said in the release.

"This obvious conflict, when combined with RCM's utter refusal to provide any financial information about RCM's dealings with the funds, left the investors no choice but to seek court supervision of the investors' investigation."

As a result, the release said the petitioning creditors filed the involuntary bankruptcy case to insure that Ritchie Capital Management has not and does not misuse its control of the funds to the economic detriment of investors.

"The involuntary filing and discovery request is necessitated by the combination of the utter lack of transparency to investors in the funds' dealings with RCM, and RCM's exclusive and complete control over the business and financial affairs of the funds," Marwil said in the release.

According to the examination motion, Ritchie Capital's management activities have been conducted in complete secrecy.

"It has made false statements to investors and a bankruptcy court to avoid independent scrutiny, especially on the topic of management compensation," the investors said in the motion.

"Its behavior in the face of investor inquiries has become increasingly suspicious. The secrecy must end now.

"If RCM has done nothing wrong, if it has not squandered or mismanaged investor assets, if it has not breached its fiduciary duties to [Ritchie Multi-Strategy] with irreconcilable conflicts of interest, then it should have nothing to hide."

Ritchie Multi-Strategy is a Lisle, Ill.-based hedge fund. Its Chapter 11 case number is 07-24236.

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