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Funds News

Archeus Capital in shutdown, legal action possible

NEW YORK, Nov 1 (Reuters) - Archeus Capital Management LLC, a $700 million hedge fund group that has told investors it will shut down, isn’t ruling out legal action against its fund administrator, which it blames for its collapse, a person familiar with the situation said on Wednesday.

Archeus “is not ruling out any options,” the person said, even though the firm’s partners, mostly ex-Salomon Brothers bond traders, “are not litigious by nature.”

Archeus, which managed as much as $3 billion at its peak two years ago, told investors in an Oct. 30 letter that it will give its money back to investors by year-end.

The delays for the 2004 and 2005 financial statements caused worried investors to pull money out of Archeus’ two main funds, the firm maintained. The cash exodus threatened its ability to maintain risk diversification in various strategies, it said.

“One obstacle we have not been able to overcome has been the negative sentiment which has snowballed as a result of our third party administrator’s failure to properly maintain the books and records of our funds,” it said in the letter.

“This failure, and their subsequent inability to properly re-reconcile the funds’ records, led to a series of investor withdrawals from which we have not been able to recover,” said the letter, which was signed by CEO Gary Kilberg and Peter Hirsch, chief investment officer.

The administrator, GlobeOp Financial Services, said it “totally disagrees with the allegations,” but said it is in “a difficult situation” because it can’t discuss confidential client matters.

“While it is easy to point fingers at third parties, investors typically liquidate based on fund performance results,” it said.

Lawyers said proving a case against a fund administrator would be difficult, and said much depends on the terms of its contract. Fund administrators typically keep books and trading records for hedge funds that are used by auditors to generate financial statements.

“If you assume that in fact GlobOp was grossly negligent or reckless and that caused the problems at Archeus, it sounds like Archeus may well have a claim against GlobOp,” said Harry Davis, a hedge fund attorney at Shulte Roth & Zabel. “But it is really hard to prove that there is a sole reason that investors redeemed.”

Archeus, which specialized mostly in fixed income arbitrage strategies, told investors it generated returns of 18.5 percent from July 2005 through September 2006 in its Concentrated Risk Fund. Its Animi Fund produced a more modest 3.25 percent for the period.

Year-to-date through the first week of October, the Animi Fund is down 1.9 percent while the Concentrated Risk Fund is up 6.75 percent, the source said.

While the results aren’t stratospheric, they reflect industry averages. Hedge Fund Research, one of several research firms that track fund performance, said its composite index of hedge funds was up 7.16 percent year-to-date.

The source said the firm eventually filed the audited financial statements with investors, but not until September 2006 for its 2005 fiscal year. Investors typically expect to see financial statements in April or May for the preceding year.

Archeus declined to comment.

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