Mass. hedge fund scrutiny called a ‘sting operation’

Feb 12, 2007 @ 7:38 am

By Jeff Benjamin

DETROIT — Hedge fund manager Phillip Goldstein, who has been accused of marketing alternative-class investments to a non-qualified investor through his firm’s website, is crying foul by drawing attention to what he described as a “sting operation” aimed at him and his company.

The complaint, filed Jan. 31 by Massachusetts Secretary of the Commonwealth William Galvin, stated that Brendan Hickey, a Quincy, Mass., resident, didn’t meet the net-worth requirements to invest in hedge funds. The complaint also stated that Mr. Hickey was able to register and receive information related to alternative investments via Mr. Goldstein’s website in early January without being screened for qualifications.

Mr. Goldstein, co-founder of Saddle Brook, N.J.-based Bulldog Investors General Partnership, doesn’t dispute that Mr. Hickey registered and received some specific hedge-fund-related information. Mr. Goldstein has challenged Mr. Galvin to consider the fact that Mr. Hickey was acting under the direction of RMR Advisors Inc., a Newton, Mass.-based money management firm involved in a separate legal battle with Bulldog Investors.

“I guess Galvin’s strategy is to file now and do the research later,” Mr. Goldstein said. “He’s just a bully, and people don’t want to get caught in his cross hairs.”

RMR, which manages $425 million in five closed-end mutual funds, has filed a lawsuit against Bulldog Investors for violating a rule that limits ownership of any of its funds to 9.8%.

RMR president Thomas O’Brien acknowledged that Mr. Hickey was directed by the company to register and request information on the Bulldog website. However, Mr. O’Brien added, it was done to gather information and was not designed as a sting operation, as Mr. Goldstein has charged.

When asked why the firm used Mr. Hickey — who does not work for RMR — Mr. O’Brien said he did not know, but he suggested that it might have had something to do with his knowledge of computers.

“I can’t tell you that we put that much thought into it,” Mr. O’Brien said. “But we were surprised by what [Mr. Hickey] did find as a non-accredited investor.”

Mr. Hickey declined to comment for this story.

Mr. Galvin said he is not focused on how or why RMR brought the case to his attention.

“I don’t get into the details of how we got into a case,” he said. “My interests are the facts, and the facts appear to be soliciting.”

At this point, Mr. Goldstein, who last year was instrumental in helping to overturn a rule that required most hedge fund managers to register as investment advisers with the Securities and Exchange Commission, now is facing two somewhat overlapping legal battles in Massachusetts.

As a shareholder activist hedge fund manager with a growing familiarity of regulatory law, Mr. Goldstein said, he has no plans for retreat.

“I’m not going to let some pompous ass sitting in Boston tell me I can’t talk to somebody or give somebody information when they ask for it,” he said. “This is not really about hedge funds; it’s about the First Amendment, and I think Galvin is just trying to get a trophy.”

Even though Mr. Goldstein believes that RMR deliberately tried to set him up by using a non-qualified investor to request information from the Bulldog website, Mr. Goldstein doesn’t believe that a crime was committed by providing the requested hedge fund information.

The Bulldog Investors website is not accessible, according to a note stating that it is being updated, but Mr. Goldstein said that there was no violation, because in order to gain access to information, as part of the registration process, Mr. Hickey agreed that it was not a solicitation.

“Providing information is not the same as selling something, and this is still a free country, and that includes Massachusetts,” Mr. Goldstein said. “What’s the big deal? We’re not planning a kidnapping here.”

Mr. Galvin’s office interpreted the presentation of the information as a form of marketing — something hedge funds are prohibited from practicing, particularly when it comes to average investors.

“They were seeking investors without making sure they are accredited,” Mr. Galvin said. “They apparently believe they have the right to do this.”

Meanwhile, Mr. Goldstein continues his activist investing strategy with regard to the RMR Hospitality Real Estate Fund (RHR), a $60 million closed-end fund of which Bulldog briefly had acquired 13.8% of the outstanding shares.

According to an SEC filing last week, Bulldog has cut its position in the fund to below 9.8%.

But the lawsuit remains, according to RMR’s Mr. O’Brien, because the company still is challenging Bulldog’s voting rights leading up to next month’s shareholder meeting, at which time Mr. Goldstein hopes to replace two of the fund’s five board members.

In addition to pursuing the board seats, the hedge fund has made a tender offer to purchase the outstanding shares for 98% of the closed-end fund’s net asset value, which would be an 11.5% premium over the fund’s current share price.

If Bulldog gains control of the fund, Mr. Goldstein said, the plan could include merging the fund, converting it to open-end status or liquidating the assets.


What do you think?

View comments

Upcoming event

Sep 24


Diversity & Inclusion Awards

Attend an event celebrating diversity and inclusion as well as recognizing those who are leading the financial services profession in this important endeavor. Join InvestmentNews, as we strive to raise awareness, educate and inspire an... Learn more

Most watched


How the 2020 elections could impact ESG investing

Joseph Keefe, president of Impax Asset Management, on the elections and how advisers can build a bridge to the next generation of clients with ESG investing.


How advisers can be a gamechanger for women investors

Why women defer to men when it comes to finances and how advisers can combat this phenomenon and make a difference for female investors, according to Heather Ettinger, founder and CEO Luma Wealth Advisors.

Latest news & opinion

Schorsch, AR Capital to pay $60 million to settle SEC charges

The former REIT czar and his firm wrongfully obtained millions linked to REIT mergers.

CFP Board postpones enforcement of its revised fiduciary standard

Board's new Code of Ethics and Standards to be enforced next June, in line with the SEC's Reg BI

Charles Schwab reportedly in talks to buy USAA brokerage, wealth management business

The deal would net Schwab roughly $100 billion in new assets.

Advisers scramble to help retirees navigate looming Fed rate cut

The Fed's first interest-rate cut in a decade has advisers warning against chasing the bait of risk over safety.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print