A U.S. District Court judge in Columbus has dismissed a number of defendants in the case against a Bermuda-based hedge fund that lost more than $216 million for the Ohio Bureau of Workers' Compensation.
Judge James Graham agreed to drop several of the individual directors of the hedge fund because the court does not have jurisdiction over them.
Although individual directors of the fund were dropped from the case, the state can continue to pursue its claims against Pittsburgh-based MDL Capital Inc. and its director Mark D. Lay, the judge ruled.
Ohio Attorney General Jim Petro last year sued MDL and its hedge fund, along with the directors of the fund, after the losses were revealed.
"We have an active and aggressive case against the hedge fund and its director, Mark Lay," said Kim Norris, a spokesman for the attorney general. Mr. Petro is trying to recover the losses on behalf of the Bureau of Workers' Compensation. The lawsuit argues that the hedge fund contract was fraudulent and violated Ohio securities laws.
In addition to MDL and its lead executives, defendants include Bermuda companies and residents who sat on the hedge fund's board of directors, some based in Bermuda. Judge Graham agreed that a number of them successfully proved they are outside the jurisdiction of the case.
"The judge basically said, 'You're not involved, '●" Ms. Norris said.
In excerpts of a deposition filed with Judge Graham's ruling, Mr. Lay says the hedge fund was created almost exclusively for the bureau.
The bureau invested $355 million with MDL over the years, starting with a more conservative bond fund. Its hedge fund lost $216 million, losses that led to the resignation of Terry Gasper, then the chief financial officer of the bureau.
Mr. Gasper, who had the authority to approve the hedge fund transfers, is expected to plead guilty this week in federal and state courts for his role in unrelated investment problems with the bureau, including accepting $25,000 from Tom Noe.
Noe is a former Toledo-area coin dealer who faces 53 felony charges in Lucas County for allegedly taking millions from coin funds he controlled on behalf of the bureau.
In related news, the Escala Group, one of the key partners in Ohio's $50 million rare-coin investment, announced yesterday that it is under a formal investigation by the U.S. Securities and Exchange Commission.
"It's not unexpected," said Phillip Kim, a New York-based lawyer representing Escala shareholders in one of several class-action lawsuits. "It was just a matter of when it would come out."
Alleging a billion-dollar pyramid scheme that involved hundreds of thousands of European investors, Spanish authorities raided the Madrid offices last month of Escala's primary shareholder, Afinsa Bienes Tangibles.
Formerly known as Greg Manning Auctions, Escala received $10.7 million in loans and direct payments from the state's rare-coin funds, which also purchased 500,000 shares in the publicly held company at a 36 percent discount in a 2002 off-market trade. Mandatory SEC filings by Escala failed to reveal the company's relationship with Ohio.
Escala believes the SEC investigation is tied to Afinsa, which contracted to buy rare stamps from Escala at an automatic 10 percent premium. The company has endured federal scrutiny for several months.
The SEC refused to disclose any documents relating to Escala last September, referring to an exemption in the Freedom of Information Act for "records or information compiled for law enforcement purposes."
A formal investigation enables the SEC to subpoena records belonging to Escala, rather than depend on the company's assistance, said Jeffrey Block, a Boston-based class action lawyer also suing Escala.
Escala's stock price fell 18 percent yesterday, closing at $6.61.
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