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Published: Wednesday, 6/15/2005

Lay's attorney defends handling of investment


PITTSBURGH - The attorney representing embattled Pittsburgh money manager Mark Lay belittled Ohio's lawsuit against his client Monday as nothing more than a case of "investor's remorse."

"Like all investors, they assumed at the end of the day there would be a massive profit - and if interest rates had gone up, there would have been," said Barry Slotnick, a litigator in the Pittsburgh law firm Buchanan Ingersoll's New York office.

Mr. Slotnick's comments came four days after Ohio accused Mr. Lay, his firm MDL Capital Management, and others of fraud and breach of contract in the wake of recent revelations that MDL Capital lost $215 million invested with it by the Ohio Bureau of Workers' Compensation.

The losses came because MDL Capital bet wrong on the direction of interest rates, using a type of transaction to hedge against an anticipated rise in long-term interest rates that did not occur.

The transaction relied heavily on borrowed bonds, magnifying losses when rates fell instead of rose, and was meant to protect the value of the Ohio agency's overall long-term bond holdings if rates rose.

Mr. Slotnick maintains that neither MDL Capital nor Mr. Lay made prohibited investments or deceived the bureau, as Friday's suit filed by Ohio Attorney General Jim Petro alleges.

"All of the allegations of how my client exceeded his discretion [over the money he managed] is belied by their old e-mails, which they should have looked at before they filed the suit," Mr. Slotnick said of the electronic correspondence between his client and Ohio officials.

In addition to e-mails, Mr. Slotnick said that Mr. Lay regularly spoke with members of the bureau about the fund. He declined to say whether the conversations were daily, weekly, or monthly, stating only that they occurred on a "usual basis."

"Every activity was reported to Ohio," Mr. Slotnick said in a phone interview yesterday. "There were constant communications between investors, the people in charge of the dollars in Ohio and MDL."

Jeremy Jackson, spokesman for the Ohio workers' compensation bureau, said last week that hedge fund investments were prohibited by the funds' broad investment policies at the time Mr. Lay made them.

Mr. Slotnick did not directly respond to questions about whether Mr. Lay's contract with the Ohio agency specifically permitted hedging activity, but said a private placement memorandum between MDL Capital and Ohio said, "Leverage is permitted, allowed and discussed." Leverage is the use of various financial instruments or borrowed capital to increase the potential return of an investment.

The lawsuit charges that MDL Capital far exceeded the limits its contract placed on leveraging.

"There were no surprises," Mr. Slotnick said. "Ohio knew exactly what was going on. They did it with their eyes opened."

Mr. Slotnick maintained that poor performance of some of Ohio's public funds had become a "political issue," and that Mr. Lay had become a "scapegoat."

The Block News Alliance consists of The Blade and the Pittsburgh Post-Gazette. Pamela Gaynor is a reporter for the Post-Gazette. Blade staff writer Joshua Boak contributed to this report.

Contact Pamela Gaynor at: pgaynor@post-gazette.com or 412-263-1613.

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