| March 20
March 20 The founder of a global medical device
company who racked up personal losses of $1.4 million in a
Goldman Sachs private debt fund is concerned about practices
that may lure investors into securities that are riskier than
sales pitches indicate.
Richard Caruso, who launched Integra LifeSciences Holdings
Corp in 1989, told Reuters he invested personal assets in a
distressed debt fund Goldman launched in 2007, only to learn it
was riskier than the firm and its advisers indicated in a
preliminary pitch before the fund launched.
Financial Industry Regulatory Authority (FINRA) arbitrators
last week, rejected claims that Caruso raised in an arbitration
filed against a unit of the Goldman Sachs Group Inc in
2009. The case, filed in the name of Caruso's family investment
vehicle, Athena Venture Partners LP. sought recovery of $1.4
million in losses from Goldman. [ID: nL1N0C6BCQ]
The arbitrators, in their ruling on March 13, described
Caruso as an "accomplished businessman with many years of
experience in entrepreneurial and financial type ventures."
The decision offers a glimpse at challenges that wealthy and
sophisticated investors often face in securities arbitration,
say lawyers. Although the wealthy do win some cases, brokerages
typically argue that such investors fully understand the risks
of the securities they are buying. That is the case even when
the investments brokerages pitch is not suitable or
misrepresented, lawyers for investors say.
Goldman approached Caruso about the fund in 2007 when first
looking for investors, he said. He decided to invest based on
information he and Athena's general partner received in a
written summary and discussions with Goldman advisers. But the
strategy Goldman pitched, while risky, was different than the
one it used, Caruso said.
Caruso, who became a Goldman client about 13 years ago, is
considering whether to try to overturn the ruling in court. "I
am concerned about other people who are trying to do things with
Goldman," said Caruso, now president of The Provco Group, a
Villanova, Pennsylvania-based venture capital and business
finance consultancy. He is still on the board of directors at
Integra, whose products include orthopedic implants and
regenerative products for bone and tissue repair.
A Goldman Sachs spokeswoman said the firm "prevailed
entirely" in the arbitration. "The panel rejected every claim
asserted and found each of them to be 'clearly erroneous' and
'false'," she said in a statement.
Convincing arbitrators that even wealthy and sophisticated
investors may have been led astray can be tricky, especially
when brokerage firms point to lengthy offering documents that
may describe a multitude of risks that did not come up in
initial sales presentations, according to Philip Aidikoff, a
lawyer at Aidikoff, Uhl & Bakhtiari who often represents wealthy
investors in complex cases.
The challenge requires proving that what a broker told the
firm's customer about an investment, or details included in
initial pitch materials were at odds with the actual trading
strategy once a product is actually launched, said Aidikoff, who
was not involved in the Caruso case.
Athena's $5 million investment in the distressed debt fund
lost up to about 50 percent of its value during the 2008 credit
crisis, according to Caruso's lawyer, David Moffitt of Saul
Ewing LLP in Wayne, Pennsylvania.
The fund was also supposed to buy quality fixed income
securities at steep discounts and then sell the securities at
face value when the market recovered, Caruso says he was told in
the presentations. Leverage, if used at all, would be small and
manageable. The fund, while speculative, was not a hedge fund,
Caruso said he was told. Caruso, who wanted the money to fund
other commitments if needed, described that representation as
"critically important" to his decision to invest.
The reality was different, said Moffitt, the lawyer. Goldman
described the investment as a "hedge fund" in some account
statements, Moffitt said. Not all the securities Goldman bought
were deeply discounted and it leveraged the fund as much as 2.7
times, Moffitt said. While the leverage was not as high as
strategies for some other credit-oriented investments in the
pre-crisis period, when some funds effectively leveraged assets
up to 10 times their value, it was not what Caruso anticipated.
The arbitrators ruled that the initial presentation included
details Caruso said it did not. Caruso also did not prove the
statements he said Goldman's advisers made, they wrote.
Caruso's losses stood at $2.4 million in late 2008, but
inched down to $1.4 million after Goldman deleveraged the fund,
Moffitt said. Goldman declined to disclose leverage ratios or
other details about the fund's investments.
A key argument by Goldman that backed the panel's decision
is that Caruso, after the initial presentations, received an
offering memorandum that described the risks. Caruso and Athena
said they did not receive the document, an argument that was
virtually impossible to prove, say lawyers.
Even so, FINRA guidance explains that brokerages cannot
point to disclosure documents as a blanket excuse for
representations made by other means, like pitches, say lawyers.
The outcome troubles some lawyers for investors who say that
a client's wealth and sophistication should not excuse any level
"Your sophistication shouldn't even make it into the
equation," said Andrew Stoltmann, a Chicago-based lawyer who