U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19428 / October 13, 2005
Securities and Exchange Commission v. Wood River Capital Management, LLC, et al., U.S. District Court for Southern District of New York (Civil Action No. 05-CV-8713) (NRB)
SEC FILES EMERGENCY ENFORCEMENT ACTION AGAINST JOHN H. WHITTIER AND THE WOOD RIVER HEDGE FUNDS ALLEGING FRAUD
DEFENDANTS CONSENT TO PRELIMINARY RELIEF INCLUDING THE APPOINTMENT OF A RECEIVER FOR THE TWO HEDGE FUNDS
The U.S. Securities and Exchange Commission today filed an emergency action against John H. Whittier, Wood River Capital Management, LLC, Wood River Associates, LLC, Wood River Partners, L.P and Wood River Partners Offshore, Ltd. The SEC's complaint alleges that the defendants repeatedly made material misrepresentations regarding the oversight and diversification of two hedge funds managed by Whittier--Wood River Partners, L.P. and Wood River Partners Offshore Ltd.
The complaint alleges from February 2003 to the present, investors placed tens of millions of dollars in Wood River Partners, L.P. based on promises that the fund would be broadly diversified and closely watched by an auditor. Instead, Whittier failed to have any audits conducted, allowed only a few employees to have access to the fund's portfolio and proceeded to amass an extraordinary position in one small-cap stock. By July 2005, that one security, the common stock of EndWave Corporation, accounted for more than sixty-five percent of Wood River Partners' claimed $265 million assets under management. This concentration in one stock vastly exceeded the ten percent cap on individual long positions set forth in the funds' offering memoranda. Wood River Partners purchased so many shares of EndWave stock that at one point the fund owned more than forty-five percent of that issuer's outstanding shares. But until last week, the Defendants never disclosed the size of their position in EndWave. The Defendants filed neither the stock ownership reports that were required to be filed when the fund's position exceeded five percent of the issuer's outstanding shares, nor the reports required to be filed when the fund's position exceeded 10 percent.
During the summer of 2005, Whittier launched a new hedge fund-Wood River Partners Offshore. By September, this fund also had an overwhelming concentration in EndWave. Whittier made similar misrepresentations about the diversification of this new fund, and similarly failed to disclose that he had placed the majority of its assets into one small-cap stock.
Since mid-July 2005, the price of EndWave's common stock has declined substantially. As a result, the value of the assets held by Wood River Partners, L.P. and Wood River Partners Offshore, Ltd. has decreased significantly.
The Commission alleged that the defendants violated the antifraud provisions of the Securities Act of 1933 ("Securities Act") and the antifraud and ownership reporting provisions of the Securities Exchange Act of 1934 ("Exchange Act"). The complaint also charges Defendants Whittier, Wood River Associates, and Wood River Capital Management with violations of the antifraud provisions of the Investment Advisers Act of 1940. For permanent relief, the Commission requested injunctions against future violations, disgorgement, prejudgment interest and civil penalties as to all defendants.
Simultaneous with the filing of the Commission's complaint, Defendant Whittier consented on behalf of himself and the Wood River entities to preliminary injunctions against future violations, an asset freeze as to the Wood River entities, an accounting and a partial asset freeze from Whittier, restraint from destruction of evidence, and the appointment of a receiver for the Wood River entities.
The particular violations alleged in the complaint are, as to all defendants: Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a); Sections 10(b), 13(d), 16(a) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78m(d), and 78p(a), and Rules 10b-5, 13d-1, 13d-2, 16a-2 and 16a-3, 17 C.F.R. §§ 240.10b-5, 240.13d-1, 240.13d-2, 240.16a-2, and 240.16a-3; and as to Defendants Wood River Capital Management, LLC, Wood River Associates, LLC and John Hunting Whittier Sections 206(1) and (2) of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6(1) and (2).