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The article, “Dan Zwirn, the Man Who Fell to Earth,” was written by William D. Cohan on February 28, 2012 for Bloomberg Business Week. The article is about Dan Zwirn, a New York investor, who lost millions of money and a number of his properties to failed hedge fund. Among the things that Zwirn lost include his condominium unit at Central Park South that was valued at $17 million, his other property at Quogue, his personal jet valued at $18 million, his business, and his remaining savings and other purchases. Zwirn’s transition from being a multimillionaire to a person millions of dollars in debt was the reason why he was dubbed “The Man Who Fell to Earth.” Cohan’s article explores Zwirn’s life, from the beginnings of his business, the difficulties and challenges that he experienced while setting up hedge funds, the events that occurred prior to his business’ demise, and what happened after Zwirn learned that he lost all his money and properties.
Although Zwirn should be acknowledged for his attempts to finance small businesses locally and internationally, his firm collapsed when he found out that the source of funding for the jet he purchased for the company was inappropriate and that behind his back, interfund transfers from international to domestic funds were being granted. After a series of investigations, Zwirn learned about accounting irregularities. Although it could have been easy for the firm to cover up for those irregularities, Zwirn chose a more honorable path. Learning that the Securities and Exchange Commission (SEC) would be more lenient to companies who reported frauds and irregularities at once without being forced to do so, Zwirn chose to report the results of the investigations. He managed to reach out to SEC to correct those irregularities, many accounts already withdrew from his management and eventually led to millions of losses. The demise of Zwirn’s funds could be attributed initially to greed, and primarily to mismanagement.
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Zwirn: The Man Who Fell To Earth
Zwirn was born in Mt. Lebanon, Pittsburgh to a middle-class family. Zwirn’s father was an accountant at a hospital while his mother was a teacher. In college, Zwirn was an over-achiever. Zwirn signed up for a dual-degree program in Computer Science and Accounting. Zwirn specialized in finance and corporate management. Zwirn attended the University of Pennsylvania and Wharton School. During the early 1990s, Zwirn obtained a job in Wall Street. While working, Zwirn also took up an MBA at Harvard. After graduating from Harvard, Zwirn secured a job at Davidson Kempner Capital Management and later on with Highbridge Capital. Eventually, Zwirn earned enough and has developed a good reputation for him to obtain a $500 million funding for his own business and account. Most of the people who knew him could attest to his exceptional knowledge in his field. Therefore, knowing that Zwirn is brilliant at what he does makes one wonder what could have happened along that way that resulted to his bankruptcy.
Unlike traditional hedge funds that use leverage to increase gains, Zwirn’s hedge fund aimed to multiply assets by providing funding or capital for small companies that cannot start their businesses due to limited finances. On the surface, one would admire Zwirn’s efforts for setting up a hedge fund that would benefit small companies that are attempting to make it big in the corporate world. Some of the companies that Zwirn financed include a Spanish radio company based in New York and another company that provides slot machines that casinos can rent out. Based on the companies that Zwirn funded, it would be easy to understand why he lost millions. However, Zwirn asserted that he implemented rigorous measures in order to ensure that the companies would make profit and eventually repay the funds that Zwirn provided. Zwirn’s strategy in doing so is “to learn everything about the prospective borrowers, figure their odds of repayment, crank up the interest rate to the proper pain point, and grin out 1 percent a month in profits” (Cohan, 2012). However, something must have gone wrong along the way, which eventually led to the D.B. Zwirn Special Opportunities Fund’s demise.
According to reports, Zwirn earned substantially for forty-nine months since he set up his hedge fund. The peak of D.B. Zwirn Special Opportunities Fund was in 2003, when Zwirn’s company grossed 21.8 percent. However, as year the years went on, the company’s gross income decreased from 21.8 to a mere 16 percent in 2007, but relatively, the company is still earning significant grosses. Due to the company’s success, Zwirn felt it necessary for him to purchase rewards. In 2005, for instance, Zwirn purchased a personal jet – the Gulfstream IV. Although the jet cost $18 million, Merrill Lynch only required Zwirn’s firm to pay $1.9 million initially. Considering his company’s earning capacity, they figured Zwirn should be able to cover all costs eventually. To pay for the $1.9 million he needed to purchase the jet, Zwirn asked his chief operating officer, Harold Kahn, to secure letter of credits from Citibank and to secure the amount through the firm’s accountant Li Anne Law. After all planning and negotiations, Zwirn was able to obtain the money for the jet - $1.8 million from domestic hedge fund and $2 million from the Highbridge Capital Management account. Although Zwirn was absolved of all faults for the failure of his firm, he admits that he contributed to the decline of his business because he was not involved during the negotiations for financing the $18 million jet. Zwirn did not care to ask where they obtained the funding for the jet.
Essentially, the transaction for the jet brought about various paperwork issues that got the firm in trouble. However, the jet was only one of the many issues that put Zwirn’s firm under the SEC’s radar. The transaction for the jet was faulted for violating the Investment Advisers Act of 1940, which means that the jet should not have been purchased using funds from the Highbridge account. Cutler, who was hired to fix the paperwork, he noticed that putting everything in place would be difficult because Zwirn’s bank accounts are disorderly. Cutler found it hard to keep up with Zwirn’s funds, the Highbridge account, and the multiple bank accounts for the businesses that Zwirn is funding. Cutler, along with Zwirn and Kahn, worked to fix the paperwork for the jet. Zwirn also had the jet transaction investigated to identify errors during the transaction. The result of Schulte’s investigation revealed that Gruss, a colleague he trusted, had deliberately arranged the fraudulent transaction for Zwirn’s jet and, unbeknownst to the company, has been borrowing money out of the firm’s books.
Zwirn, afraid that Gruss weak judgment and mistakes would reflect on the company, decided to report the issue to the Securities and Exchange Commission (SEC). Based on previous cases, SEC was more lenient when companies directly reported fraudulent schemes in their own firms. Aside from reporting to the SEC, Zwirn also sued Gruss on accounts that Gruss “knowingly misused the signatory and approval authority he had over the funds held in client accounts and directed and/or authorized more than $870 million in improper transfers of client cash” (Cohen, 2012). The SEC also sued Gruss for his misdeeds. However, in Gruss’ defense, he claimed that interfund transfers – the transfer of funds from international to domestic funds- was legal and consequently called for the lawsuit against him to be dismissed by the SEC. According to the SEC, Gruss obtained payments before they were set for release. Zwirn was taken to trial but was absolved of charges by the SE. In February 23, 2011, the SEC removed all fault from Zwirn for his firm’s demise. Subsequently, Zwirn was found innocent for the failure of his company in April 7, 2011. Zwirn keeps the letters that prove his innocence in two tombstones that h keeps in his office. According to SEC, those losses in Zwirn’s firm could be attributed to weak and disorganized management of its finances. The fault was internal, but cannot be solely blamed on Zwirn because it was Gruss who committed the misdeeds.
Zwirn could learn from his experience, especially in becoming more involved with financial dealings within the company. Apparently, many people inside the company have already noticed Gruss’ improper practices. Silvia Wu, the senior accountant at Zwirn’s firm, even resigned in 2005 when she had to do an improper interfund transfer requested by Gruss. Based on the results of the investigation, it is clear that Zwirn could have done so much to prevent the interfund transfers. If Zwirn could have been more engaged with the transactions, he could have noticed the interfund transfers Gruss has been requesting in the past years. According to Zwirn, he says that the experience has changed him significantly. Cohan described Zwirn, “His once-ubiquitous self-confidence is gone, and he’s more cynically; he says he no longer believes the world is meritocratic or that doing the right thing always yields the right result.”
Although the Zwirn case was largely attributed to mismanagement and internal issues related to oversight, Gruss has claimed that the firm’s demise was Zwirn’s fault. According to Gruss, Zwirn could not claim that he was unaware of the transactions that he requested to accounting because Zwirn was highly involved with internal operations. According to Gruss, Zwirn was a micromanager who was aware of all the dealings and transaction in the business. Therefore, Zwirn could not have missed the transfers that Gruss requested. In addition, Gruss affirms that the transfers were legal so the financial troubles could not be blamed on his transactions. According to Gruss, the firm was already in trouble under the management of Zwirn and since he is looking for a fall guy, Zwirn chose to dump all the firm’s problems on his legal transfers. Aside from Gruss, many employees who worked for Zwirn talked about how demanding he was as a boss, and how his greed contributed to the demise of the company. According to former employees, Zwirn insisted on taking on every deal that signed up for the firm.
In retaliation, Zwirn sued Gruss for $45 million in damages and to prove that Gruss’ accusations were untrue, he hired Gibson Dunn to investigate the matter. The results of the investigations revealed that the company’s shortcomings were brought about by the “substantial growth over a relatively short period of time.” At present time, all accounts under Zwirn’s firm are still under investigation. At present time, Zwirn is managing two small banks and a finance company in Beverly Hills, California. He currently lives at the Upper East Side, New York with his family in a rental apartment. Regarding his future plans, Zwirn is planning to get a Ph. D. in foreign policy or philosophy and back into the business by signing up few investors from London.
What Happened to Dan Zwirn?
The demise of Dan Zwirn’s could be attributed primarily to greed and then to oversight. In the article written be Cohan, it is palpable that the company was not in need of the $18 million private jet. However, despite the jet being more a liability than an asset, Zwirn still insisted on purchasing the jet. That was when all the trouble started. Majority of problems in the world of finance could be attributed to greed. According to Strachman (2008), fraud in the hedge fund industry primarily occurs because most people in the business are greedy. Yes, greed could be a contributive factor to the success of hedge funds, such that greed drives people to look for various ways to multiply their assets. However, greed could also be a disadvantage and in the case of Zwirn, greed could be blamed for it. Due to Zwirn’s insistence on buying a jet, his firm had to appropriate finances to fund for the purchase. During the transaction, $2 million was taken from Zwirn’s Highbridge account to fund for the jet. However, the transaction was considered inappropriate. According to Zwirn, the firm’s demise could also be attributed to the speed by which the company grew. Zwirn was greedy and wanted to expand his business fast. According to former employees, Zwirn signed up every account that wanted to work with him.
One upside of the jet transaction was that it led to Zwirn’s discovery of Gruss’ misdeeds. When Zwirn learned about the inappropriate of funds for the jet, he asked Schulte to investigate all the transactions within the company. What Schulte found out is that Gruss was requesting for interfund transfers from international hedge funds to finance domestic accounts. Although Gruss claimed that it was legal, Zwirn said that interfund transfers were not amenable to the firm. Zwirn’s discovery consequently led to his filing of s self-report over at SEC and the series of lawsuits that followed between Zwirn and Gruss and the SEC and Gruss and Zwirn. Since Zwirn only found out about Gruss’ transactions later on, the failure of his firm could also be attributed to oversight and mismanagement.
Zwirn should have been aware of the transactions. According to Gruss, Zwirn is a micromanager. Moreover, many of Zwirn’s colleagues applaud him for his brilliance in his field of work. Zwirn’s academic achievements and work experiences could also be used to attest for his work ethic. However, he missed all the signs that could have alerted him to take action. Zwirn’s accountants were already aware of Gruss’ transactions while Zwirn remained unaware. Moreover, Zwirn was not involved in the jet transaction. If he was, he could have identified the improper use of funds from his Highbridge account and obtained the funds needed for the jet from another source. Instead, Zwirn later on found out after an investigation and the damages were too late to be reversed. When Zwirn later on asked Cutler to fix the transactions, Cutler noticed that the firm’s finances were highly disorganized, which made it difficult for them to conduct audits and correct the inappropriate transactions.
Relatively, the accounting irregularities that were discovered were minimal compared to accounting frauds committed by other firms. Moreover, Zwirn was expecting that the company would suffer less because he reported the irregularities at once to the SEC. However, the severity of the problem escalated because the firm lost multiple accounts in the process. Many companies investing in Zwirn’s firm withdrew their accounts, and therefore, Zwirn had to pay back everything they owed to these companies. “Despite the company’s efforts and willingness to make things right, the trust had been broken and one thing led to another – ‘another’ being massive redemptions” (Strachman, 2008, N.D.). All in all, Zwirn lost $70 million from his own pocket for legal fees and expenses alone. Zwirn had to pay more to pay for debts to investors.
The case of the D. B. Zwirn Special Opportunities Fund is a classic example of how greed and mismanagement will lead to a promising company’s demise. Although Zwirn’s firm was highly successful, earning 21 percent gross after the first six months of business and eventually becoming a billion dollar earning company after two years, greed and mismanagement led to its downfall. Initially, Zwirn asked to purchase an $18 million jet, which the company did not need. In order to fund for the jet, $2 million were inappropriate taken from the company’s Highbridge account. Later on, further investigations revealed that unbeknownst to Zwirn, his colleague, Gruss, was committing interfund transfers, which inappropriate because some of the funds were being taken without interest. Zwirn only learned about this after the investigation. In Zwirn’s case, his closer involvement with transactions in the organization and proper organization of finances could have prevented the firm’s losses from happening.