A handful of investors in hedge funds run by Key Biscayne bond trader John Devaney filed arbitration claims in the year before the funds collapsed, seeking to recoup their losses from his broker-dealer affiliate, United Capital Markets.
The hedge funds, managed by United Capital Asset Management, an affiliate of United Capital Markets, were pronounced dead by Devaney in a letter to his investors Wednesday. According to Devaney, about 150 investors, including some from his hometown of Key Biscayne, have lost about $510 million.
Devaney himself has lost more than $100 million, he said. His losses amount to about half his net worth, he added. But he still has a 126-foot yacht, the Dorothy Ann — a present to his mother — moored behind his Key Biscayne home.
The failed funds — Horizon Fund, Horizon ABS Fund, Horizon Fund III and Horizon ABS Master Fund — invested in junk bonds, which have collapsed in value over the past year amid unprecedented turmoil in the credit markets.
United Capital denied the assertions made in three separate arbitration claims over the past year, according to records at FINRA, the Financial Industry Regulatory Authority, which regulates the brokerage industry.
In an interview Thursday, Devaney, 38, who was at Sardy House, his 16-bedroom Victorian vacation home in Aspen, Colo., declined to comment specifically on the arbitration claims. But he said the majority of his investors have stood by him during this difficult time, with only a few complaining about their losses.
“More of the individuals sent my wife and I flowers and cards . . .,” Devaney said.
The collapse of Devaney’s funds was all the tight-knit community of Key Biscayne talked about Thursday.
“Everybody knows what’s been going on with Mr. Devaney,” said Alexander Avila, the publisher of Key Biscayne Magazine, a glossy monthly highlighting luxury living on the island.
“Those who invested made a lot of money when it was going good. When it went bad, they lost,” said Robert Vernon, Key Biscayne’s mayor. “I don’t know how much of that money belonged to Key Biscayne residents.”
Devaney acknowledged that some of his investors are angry: ‘They won’t accept responsibility for an investment and they say, ‘Hey, this guy still has a waterfront home.’ “
But he said all his hedge fund investors were institutions or high-net-worth individuals savvy enough to know the risks.
One unhappy investor, Stuart Hayim, who lives in New York and Key Biscayne, filed an arbitration claim with the American Arbitration Association in June, seeking to recover the $1.8 million he says he lost. According to his attorney, Lawrence A. Kellogg, of Tew Cardenas in Miami, Hayim was assured he could withdraw funds whenever he wanted, but instead found himself locked in a frozen fund that spiraled downward.
“We will be looking to collect from the broker dealer and from Mr. Devaney personally because of the assurances he made to my client,” Kellogg said.
Last July, Devaney took the unusual step of halting withdrawals to prevent an exodus of investors spooked as subprime mortgage woes began to unfold. He said he wanted to avoid selling at depressed prices, with the hope that the market would rebound.
But it has not.
On Thursday, Devaney said the fund had lost about 90 percent of its value by September 2007.
“It was hanging on to the side of a building by fingernails,” he said.
The death blow came late last month when Deutsche Bank, the funds’ main lender, issued a margin call — a demand that the funds put up additional collateral to back their loans. When the funds couldn’t meet the margin call, the bank declared the loans in default and auctioned off the funds’ bonds. A second lender, Pershing, a unit of Bank of New York, then terminated its lending lines to the funds.
Devaney’s firm is facing a second arbitration claim filed in December by Beverly Hills, Calif., attorney Philip M. Aidikoff and Miami co-counsel Mark F. Raymond of Broad and Cassel on behalf of a Southern California investor who declined to be identified and who seeks the return of about $350,000.
A third complaint, filed with FINRA in February, seeks $6 million in damages on behalf of three hedge fund investors.
Devaney said warnings that the full principal can be lost were prominent in all the funds’ disclosure documents.
“All investors were put through net-worth tests, screenings and a cooling-off period before they could invest,” Devaney said. “Anyone investing in a fund making 40 percent return a year had to have a lot of disclosure about the risks.”