FrontPoint Partners' demise is widely attributed to the a major insider-trading scandal that sent one of its top hedge fund managers to prison. But the estate of one of the defunct firm's hedge funds has a different theory: It was brought down by Libor manipulation.
Salix Capital, one of FrontPoint's former funds, sued a host of banks this week, alleging that they kept the interest rate artificially low, causing $250 million in damages to the hedge fund, which "relied on the integrity of how Libor was set and the truthfulness of defendants' representations about how Libor was set in entering into" Libor-pegged interest-rate swaps with the banks.
"By suppressing Libor, defendants artificially lowered the amount they were contractually obligated to pay to the funds under the interest rate swaps, while still demanding that the funds make the contracted-for (comparatively high) fixed-rate payments," the lawsuit, filed in New York State court, alleges. "In marketing the basis packages, defendants misrepresented Libor and omitted to disclose their manipulation of Libor."
The suit goes on to blame those 2008 losses for FrontPoint's demise. The hedge fund was set to spin off from Morgan Stanley in 2010 when top healthcare manager Joseph Skowron was accused of insider-trading. Skowron's hedge funds accounted for about half of FrontPoint's $7.5 billion in assets, and investors began to flee its other hedge funds in droves.
The banks named in the lawsuit are Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, JPMorgan Chase, the Royal Bank of Scotland and UBS.