John Paulson firm sued over Sino-Forest bet

Tue Feb 21, 2012 6:03pm EST

Hedge fund director John Alfred Paulson, president of Paulson & Co Inc, testifies before a US House Oversight and Government Reform Committee hearing on the regulation of hedge funds, on Capitol Hill in Washington, November 13, 2008.  REUTERS/Jonathan Ernst

Hedge fund director John Alfred Paulson, president of Paulson & Co Inc, testifies before a US House Oversight and Government Reform Committee hearing on the regulation of hedge funds, on Capitol Hill in Washington, November 13, 2008.

Credit: Reuters/Jonathan Ernst

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(Reuters) - A firm run by John Paulson was sued on Tuesday by a prominent Miami investor who claimed the billionaire's hedge funds failed to conduct proper due diligence on Chinese forestry company Sino-Forest Corp before buying shares, costing investors more than $460 million.

The lawsuit by Hugh Culverhouse, whose namesake father once owned the Tampa Bay Buccaneers team in the National Football League, is among the first targeting Paulson since his funds suffered large double-digit percentage losses in a disastrous 2011, even as U.S. stocks overall were little changed.

Those losses marked a reversal for Paulson, whose successful bet against subprime mortgage debt prior to the global financial crisis drove huge inflows into his firm Paulson & Co. That bet also helped make him the 17th-richest American, worth $15.5 billion according to Forbes magazine.

Paulson & Co in a statement said Culverhouse's lawsuit lacks merit. Lawyers for Culverhouse did not immediately respond to requests for comment.

According to the complaint filed in the U.S. district court in Miami, Paulson's Advantage and Advantage Plus funds by 2011 owned about 14 percent of Sino-Forest shares, a stake valued at about $800 million.

That bet blew up after the short-seller Muddy Waters LLC last June questioned Sino-Forest's accounting and whether it inflated the value of its forestry assets. Sino-Forest shares fell 72 percent in the next two days in Toronto.

Sino-Forest has denied Muddy Waters' accusations, but an internal company committee last month issued a report saying "there remain issues which have not been fully answered" about its business and relationships with land owners.

Culverhouse accused Paulson's firm of "gross negligence" for having failed to analyze "the substantial risks of holding a near-billion-dollar investment in a forestry company based in China" before investing in Sino-Forest.

His lawsuit seeks class-action status for fund investors, as well as compensatory and punitive damages. The complaint does not say how much Culverhouse and other investors lost.

In its statement, Paulson said its funds lost just C$105 million (now US$105.3 million) on Sino-Forest because it had sold much of its stake from early 2010 to May 2011.

"As in all our investments, Paulson has access to the same information that everyone else in the securities markets does," it said. "Like other public market investors, we must rely on audits and underwriter due diligence for comfort that financial statements and disclosures are accurate and reflect the true state of affairs at companies with publicly traded securities."

The Advantage Plus fund fell about 52 percent last year, while the Advantage fund lost about 36 percent, people familiar with the funds have said.

The case is Culverhouse v. Paulson & Co et al, U.S. District Court, Southern District of Florida, No. 12-20695.

(Reporting By Jonathan Stempel and Katya Wachtel in New York; Editing by Bernard Orr)

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