NEW YORK (CNN/Money) -
John Meriwether defended his former hedge fund's transactions in federal court on Wednesday, some five years after the fund's near demise.
The Wall Street Journal reports that Meriwether testified in a New Haven, Conn., courtroom about a 1996 deal in which his fund, Long-Term Capital Management (LTCM), swapped a stake in its hedge fund for preferred shares in five companies owned by Onslow Trading & Commercial LLC.
The government alleges that the transaction between LTCM and Onslow, which acquired the preferred shares in exchange for lease-stripping and sales-lease-back transactions, have no economic merit, the paper reported.
The Internal Revenue Service, which considers the transaction to be an illegal tax shelter, wouldn't allow the hedge fund's partners to claim the $106 million in losses resulting from the transaction on their 1997 federal income-tax forms. LTCM paid the taxes owed and sued the government in 2001 for a refund.
Meriwether told the court that while he couldn't remember the specific details concerning the questionable preferred-stock transaction, he was "comfortable" with the deal at that time. He also said that his partners, including Nobel laureate Myron Scholes, were "extraordinarily thorough" and had "a strong sense of the right thing to do," the Journal noted.
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Meriwether's attorney argued that the transaction generated a 2 percent management fee for the fund. But the government counter-argued that the fee couldn't have been that important to LTCM because its decision to reduce the fund by $2.5 billion to $4.5 billion one year later caused the fund to forfeit $50 million in management fees.
Meriwether agreed that $50 million was a significant amount of money and said the decision to return money to the fund's investors in November 1997 generated a lively debate within the firm, the paper reports.
The hedge fund suffered massive losses, and the fund's managers said they lost millions, in 1998 after a Russian currency crisis sent investors to safe-haven investments. Meriwether told the court that had the fund had "sufficient capital" to take advantage of other opportunities in the market, he and his partners could have salvaged the firm.
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