Hedge Fund Investors Accuse UBS Of Fraud, Insider Trading

May 24 2007 | 10:26am ET

The founder of collapsed hedge fund Wood River Partners has been charged with bilking clients out of $88 million, but some angry investors say he wasn’t the only one with his hand in the cookie jar.

In a lawsuit filed in New York this week, investors who had $79 million with the defunct fund charge that its prime broker, UBS, used inside information—and Wood River’s own shares in a radio equipment maker—to create a short market for the stock to Wood River’s detriment. The suit, which is seeking $200 million in damages, alleges the bank earned more than $100 million in ill-gotten gains.

According to prosecutors, Wood River founder John Whittier took an 80% stake in Endwave Corp. without reporting his interest to the Securities and Exchange Commission as required. The lawsuit alleges that UBS knew Wood River had misrepresented its position, and then lent out Wood River’s shares—and encouraged other UBS clients to do the same—in spite of an allegedly explicit instruction from Whittier not to lend out Endwave shares.

“Instead of taking corrective action, making disclosure, or withdrawing, UBS not only aided Wood River’s and Whittier’s fraud, but conceived a scheme to defraud the market and exploit this inside information for its own benefit,” the lawsuit charges.

The plaintiffs claim that the short market created by UBS adversely affect Wood River’s ability to unwind its huge stake in Endwave.

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