Cleveland Browns Owner, Hedge Fund Battle Over Seed Capital

Mar 21 2011 | 6:57am ET

Billionaire Randy Lerner wants his money back. Hedge fund Paige Capital Management says he can't have it. And so as with so many such disputes, the matter has landed in court.

Delaware Chancery Court last week began hearing the case of the unhappy relationship between Lerner, the owner of the National Football League's Cleveland Browns, and Paige Capital, the distressed debt hedge fund he seeded with $40 million three years ago. The former says Paige is "hiding" his money; the latter, which is collecting $400,000 per year in management fees from Lerner, says Lerner's family office has done just about everything to sink its business.

At issue is a gating provision imposed by Paige, which bars investors from withdrawing more than 20% of the hedge fund's total capital. That's a real problem for Lerner, because his capital accounts for 99.9% of Paige's capital, the hedge fund's founder, Michele Paige, acknowledged.

Paige also acknowledged that she had done very little investing of Lerner's money, telling the court she became spooked by signs from the family that it had taken a beating during the financial crisis.

"From a humanitarian perspective, I didn't want to be the reason that they… lost their empire," Paige testified. She invested only 10% to 30% of the money entrusted to her.

Until, that is, representatives of Lerner told her in August of 2009 that the family had done its own distressed investing, and made a killing. Then she poured all of Lerner's money, and then some, into investments, becoming "100%-plus invested." The Lerners countered by filing to redeem their entire investment in October, when their three-year lockup expired.

But, Paige testified, the Lerners' troubles became her own, making it hard to line up other investors. One pulled out after she told it that her main seed investors "had issues of their own."

Paige's husband, Christopher, the hedge fund's general counsel, put it more succinctly in a letter to Lerner that he no doubt wishes he could take back: Paige Capital, he wrote, would "litigate this matter to the bitter end because we will continue to manage your money, and collect management and incentive fees, until this matter is resolved many years hence."


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