By Britt Erica Tunick
Two of the most poisonous associations in the hedge fund world these days are Raj Rajaratnam and Bear Stearns Asset Management, and New Castle Funds is in the unfortunate position of having close ties to both. In January 2009, New Castle Funds was actively marketing its hedge funds’ performance with documents touting the firm’s market-based “insider behavior” approach to evaluating investments. These days the firm is trying to distance itself from anything to do with the word “insider” following charges of insider trading brought against Mark Kurland, New Castle’s cofounder and chief executive, and consultant/portfolio manager Danielle Chiesi.
Soon after Galleon Group founder Rajaratnam was charged with securities fraud and insider trading in October, New Castle was thrust into the spotlight when regulators levied charges against Kurland and Chiesi as part of that investigation. The charges quickly brought an end to Galleon, but New Castle’s management is struggling to hang on. Just days after the allegations were made, Robert Reitzes, New Castle’s president and chief operating officer, and Scott Merves, an executive vice president, sent a letter to investors reassuring them that the firm had severed all ties to Kurland and Chiesi and that investor assets were safe.
Reitzes co-founded the firm with Kurland in 1995. In the letter, they wrote, “Despite our initial shock, we are determined to successfully navigate through this period and emerge stronger than ever.” The letter added, “We will do so by working hard to continue to earn your trust,” but it went on to note that if investors chose to redeem their investments, their requests would be honored.
Until recently, things seemed to be going well at New Castle. By January 2009, assets under management had reached $1.1 billion, spread across three main long/short equity strategies and five funds. The firm’s flagship New Castle Partners fund, which launched in 1995 and had annualized returns of 13.34% through September, is a long/short fundamental research strategy. The New Castle Millennium fund, which relies on a strategy focused on hedging through options, launched in 1997 and had annualized returns of 10.73% through September. The New Castle Market Neutral fund, launched in 1998, is a convertible and equity arbitrage fund that had annualized returns of 10.33% through September. The New Castle Millennium II fund, launched in 1999, is a long/short fund focused on large- and mid-cap equities; it had annualized returns of 8.83% through September. The New Castle Fallen Angels fund, which launched in 2002, is a market-neutral equity fund with annualized returns of 10.89% through September.
New Castle isn’t tainted only by its connections to Kurland, Chiesi and Galleon. It is also tarred by the fact that it was incubated by Bear Stearns Asset Management.
Some potential investors saw that as a problem from day one: “We didn’t think they were particularly bad guys, but one of our internal concerns was that Bear was always a very slippery place,” says one institutional investor who shied away from investing with New Castle because of Bear’s tarnished image. “Bear always had a sleazy reputation,” he says, “so that gave us some pause. The other reputation at Bear was that you really couldn’t trust them about things like Chinese walls.”
In 2008 two Bear Stearns hedge funds collapsed as a result of heavy bets on the subprime mortgage market. And then former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin were charged with wire fraud and securities fraud. Cioffi was also charged with insider trading. After a highly publicized trial in a federal court, in early November the pair were found not guilty, but the allegations only heightened the concern in some circles about Bear Stearns’ progeny.
New Castle was one of several hedge fund firms launched within Bear Stearns Asset Management around 1995, and the firm’s ties to Bear run deep. The biographies for 10 of the 15 people included in New Castle’s marketing documents—Kurland, Reitzes and Merves, who co-managed all of the firm’s funds—list stints at Bear.
Kurland, who was serving as Bear Stearns’ director of global equity research at the time he and Reitzes launched New Castle, joined Bear in 1991 from Mabon Nugent, where he was co-head of institutional equities and director of research. Reitzes, who was co-director of research for securities firm C.J. Lawrence from 1991 through 1994, also spent time at Mabon Nugent, where he was chief investment officer from 1984 through 1991. Merves joined New Castle in 2002 from Glenview Capital Management, where he was a senior equity analyst. But he was with Bear’s equity research group from 1994 through 2000. In addition, Gerald Cummins, New Castle’s chief financial officer and chief compliance officer, was with Bear for 15 years.
In addition, Mariner Investment Group, which began a joint venture with New Castle at the beginning of 2009, also has a Bear connection. William Michaelcheck, Mariner’s founder, chairman and chief investment officer, was with Bear from 1979 through 1992, holding positions such as executive vice president and co-head of its fixed-income division. Under the joint-venture agreement, Mariner receives revenues from the New Castle Market Neutral fund in exchange for support services the firm provides to New Castle, such as back-office and technology services, compliance and legal support.
When New Castle was set up, “the initial hook for these guys was that they were tied into Bear information and were very active on the short side,” says an investor for one fund of funds. In addition, investors familiar with the firm believed a sizable portion of its assets under management came from Bear’s own money. The other major investors were high-net-worth offshore investors; little money came from institutional investors. A spokesperson for New Castle declined to comment for this story, and multiple calls to Mariner were not returned.
Chiesi remains conspicuously absent from New Castle’s marketing materials, and her role at the firm is unclear. Formally, she has been an outside consultant for New Castle. She is widely reported to have significant ties to Kurland, who allegedly thought highly of her ability to schmooze and coax information out of people. He reportedly lobbied to get her a more senior position within the firm. But the extent of Chiesi’s involvement in the insider-trading scheme is baffling to investors familiar with her. “When you look at her role as the middle person for all this insider-information flow, I don’t really know what her currency was or what she brought to the table,” says the fund-of-funds investor, who likens her personality to that of the character played by Melanie Griffith in the movie “Working Girl": “She was just in-your-face and foul-mouthed.” Interestingly enough, although Danielle Chiesi is not included in New Castle’s marketing documents, the firm does list an Allison Chiesi as a senior analyst who has been with the firm since 2001. She is reported to be a relative of Danielle.
Bear’s Cioffi and Tannin were found not guilty, and it is of course possible Kurland and Chiesi—and even Galleon’s Rajaratnam—will eventually be cleared of charges against them.
Meanwhile, several observers say that despite New Castle’s consistent returns and assurances from Reitzes and Merves that the firm remains solid, many investors have been taking advantage of the firm’s liberal redemption terms, which require only 30 days’ notice. For those investors still sitting on the fence, the question is whether the firm can successfully distance itself from not one but two bad connections.
