Carlyle Group has been sued by a former portfolio manager for one of its hedge funds, who accused the firm of “knowingly and intentionally fraudulent” behavior.
Nikhil Dhir, an ex-oil specialist for Carlyle’s Vermillion Asset Management, filed the case Tuesday. Dhir complained internally that the fund was misleading limited partners about an investment’s size, risk, and liquidity to avoid losing fees, the suit alleged, leading to his wrongful firing.
A spokesperson for Carlyle said the claims were “baseless and frivolous,” and that this is the second time Dhir has filed a complaint of this nature. The first, a case filed with the Department of Labor, was “dismissed with prejudice” last month, Carlyle said.
“Transparency, integrity, and our fiduciary duty are the core of our commitment to our investors and we will vigorously defend ourselves,” the spokesperson said.
Dhir alleged Vermillion’s Viridian fund had built an overweight position in derivatives based on freight rates, with the portion of the fund allocated to freight growing to over 90% between 2012 and 2014. This is despite promises to investors—including public pensions—that no more than 30% of the fund would be allocated to a single commodity.
“In violation of how it was marketed to investors, this did not constitute a diversified investment fund, by any account,” the lawsuit stated.
The fund initially entered into the long freight position in 2012, and held on after Dhir’s dismissal in February 2015. According to the complaint, the partners of the fund consistently claimed that “the position was liquid and could be exited with minimal market impact.”
As the hedge fund suffered “large losses and a rapid increase in volatility,” Vermillion co-founders Chris Nygaard and Andrew Gilbert, along with Chief Operating Officer Chris Zuech, “told investors that the freight position was the right position, and advised them to keep their money in the fund for a recovery… because it would increase the amount of fees the partners would receive from investors.”
By October 2014, the case said, “every data point indicated the investment was risky and dangerous.” In a meeting with Gilbert and Nygaard, Dhir and other portfolio managers likened the situation to the Enron scandal. Nygaard responded that it would be better for the hedge fund to let freight go to zero, even though it would hurt clients, according to the complaint.
Dhir and others continued to raise concerns, accusing the fund of acting “crazy” and irresponsible.” Gilbert warned the portfolio managers would lose their jobs if they insisted that investors be advised of the problems, the suit alleged. Meanwhile, the fund’s partners continued to “mislead investors… about the nature of the risk and the continued viability of the investment.”
Dhir alleged he was “suddenly terminated” for his whistleblowing activities at the end of January 2015, despite having produced profits of $11.5 million in 2014. The other portfolio managers who complained were also fired.
Carlyle terminated Nygaard and Gilbert in June 2015 for “malfeasance,” according to the complaint. Zuech remains an employee at Carlyle.