Third Avenue, Whitman are sued over junk bond fund collapse

NEW YORK (Reuters) - Third Avenue Management, founder Martin Whitman and other executives at the value investment firm have been sued for at least $500 million over last month’s sudden collapse of a junk bond mutual fund they oversaw.

In a complaint filed on Friday with a New York state court in Manhattan, an investor in the Third Avenue Focused Credit Fund accused the defendants of gross negligence for failing to ensure that the fund had enough liquidity to avert its demise.

“Defendants’ failure to plan and prepare for the fund’s entirely foreseeable liquidity crisis killed the fund,” according to the complaint filed by William Engel, a 75-year-old retiree from Putney, Vermont on behalf of fund investors.

Whitman, 91, a well-known value investor, is chairman of Focused Credit. Several other Third Avenue officials were named as defendants, including former Chief Executive David Barse.

Daniel Gagnier, a spokesman for Third Avenue and Whitman, declined to comment. Barse could not be reached at home for comment.

Third Avenue, which is based in Manhattan, closed Focused Credit on Dec. 9 and halted redemptions after nervous investors flooded it with withdrawal requests that it could not meet by selling assets at what it called “rational” prices.

The fund had posted a nearly 30 percent loss in 2015 prior to the closure, and assets had shrunk to $789 million from $2.97 billion a little over a year earlier.

Barse left Third Avenue less than a week after the liquidation was announced.

Engel said the defendants should not have let the fund invest “deeply” in illiquid assets, and should have sold liquid assets while they had a chance to meet redemption demands.

“Third Avenue is a mutual fund. They treated it like it was a hedge fund,” Engel’s lawyer Jacob Zamansky said in a phone interview. “Third Avenue had more than two years of warning that a high number of redemptions was coming, but kept buying illiquid, untraded securities. This conduct is reckless.”

Engel had invested $20,000 in the fund, and been an investor there since 2009, according to Zamansky and court papers.

The case is Engel v. Third Avenue Management Co et al, New York State Supreme Court, New York County, No. 650196/2016.

Reporting by Jonathan Stempel in New York; Editing by Tom Brown and Alistair Bell