NIR Group seeks to calm nerves as probe widens

* Investor letter says hedge fund did nothing wrong

* Two-year criminal investigation focuses on valuations

* Sentencing of a key witness postponed until summer

By Matthew Goldstein

NEW YORK, Jan 28 (Reuters) - Hedge fund manager Corey Ribotsky recently sent a letter to his investors in his NIR Group telling them he has been the subject of "rumor and innuendo" and that his firm did nothing wrong.

Ribotsky wrote to his clients -- a relatively rare occurrence -- nearly a year after the initial disclosure that his $750 million hedge fund was being investigated by federal prosecutors for allegedly inflating returns.

"We are forwarding this letter in order to attempt to alleviate some of the concerns you may have," Ribotsky said in the Jan. 14 letter to investors in his Roslyn, New York-based fund. "We do not believe NIR has engaged in any wrongdoing, and NIR continues to cooperate fully in the governmental investigation."

Despite Ribotsky's assurances, there are indications that U.S. authorities are stepping up their inquiry, said people familiar with the situation, who declined to be identified because of the sensitivity of the matter.

To view the letter in full, click on r.reuters.com/raj77r

Earlier this month, federal prosecutors in Brooklyn, New York, postponed the Jan. 7 sentencing of Daryl Dworkin, a former NIR analyst, who pleaded guilty last summer to securities fraud and agreed to cooperate with authorities. The new sentencing date for Dworkin is July 15.

The long-running investigation has cast a cloud over the 40-year-old Ribotsky, whose hedge fund once was one of the biggest providers of financing to so-called penny stock companies.

Before the financial crisis, Ribotsky also made a name for himself by managing about $3 billion in mortgage securities backed by subprime home loans. Most of those CDOs, arranged by Merrill Lynch, now part of Bank of America Corp (BAC.N), are now worthless.

'MATERIAL FALSE STATEMENTS'

Ribotsky's attorney, Jordan Hershman, a partner with Bingham McCutchen in Boston, reiterated much of what his client said in the letter to investors. He said Ribotsky and NIR Group "do not believe that they have engaged in any wrongdoing."

Last July, in pleading guilty, Dworkin told a federal judge that he, Ribotsky and others "would make material false statements and omissions to NIR's investors and their representatives" about the performance of the firm's funds, according to a court transcript.

Dworkin pleaded guilty to taking kickbacks from "deal finders," who brought investment opportunities to the hedge fund. Dworkin said he tried to hide those kickbacks from the fund's senior management.

NIR Group, which once managed nearly $1 billion, invests mainly in PIPEs, or private investments in public equity -- a type of financing popular with cash-strapped penny stock companies.

Dworkin's lawyer, Jonathan Marks, declined to comment on the kind of cooperation his client is providing to federal authorities. A spokesman for Brooklyn U.S. Attorney Loretta Lynch also would not comment.

Legal experts said it is not uncommon for prosecutors to postpone sentencing of a cooperating witness until after an investigation is over.

Investors in Ribotsky's fund have been mostly unable to get their money back since November 2008. Like many hedge funds during the financial crisis, Ribotsky suspended redemptions or "gated" his fund.

'FANCIFUL' HOLDINGS

But the gate has remained in place longer than most investors expected and that has precipitated several investor lawsuits, one of which is being closely watched by federal authorities, sources said.

In December, a New York state judge had directed Ribotsky to let lawyers for Palmetto Partners -- an investment vehicle for wealthy investor Steven Mizel -- to take his deposition. Palmetto, which is trying to redeem a $1.7 million investment, claims the valuations NIR group placed on its small-cap holdings were "fanciful."

Ribotsky's deposition, scheduled for Jan. 28, was postponed because of this week's big Northeastern U.S. snowstorm, said a person familiar with the situation. Joel Feffer, the lawyer for Palmetto Partners, declined to comment.

A person familiar with the litigation said federal authorities are interested in the deposition to see what, if anything, Ribotsky testifies to on the issue of valuations.

Ribotsky, in his Jan. 14 investor letter, said the suspension of redemptions in 2008 was necessary to preserve the fund. He likened himself to a "captain" navigating a ship through a terrible storm and expressed dismay at how his name "has been maligned in the press." (Reported by Matthew Goldstein, editing by Matthew Lewis)