The Law firms of Vernon Litigation and Dovin, Malkin, & Ficken, have recently filed two more cases against GenSpring Family Offices, LLC in arbitration on behalf of two different ultra-high net worth investors. Similar to previously filed Claims by the two law firms, both new Claims assert that GenSpring mishandled the significant investment accounts that were entrusted to them.
The first of the two new Claims notes that the Trust involved went through the necessary time and effort to interview multiple investment firms and other money managers. In fact, besides GenSpring, the Trust spoke with CitiGroup, Goldman Sachs, Deutsche Bank, Credit Suisse and LaSalle Bank, all of whom had a similar recommendation: diversify across traditional asset classes—which include equities, cash and traditional fixed income in bonds. These institutions also recommended using some alternative investments as a separate class of investments for special situations.
According to the Claim, however, GenSpring stood out to the Trust because it represented that it employed a unique approach to the traditional asset class diversification model, which provided better returns with a higher level of downside protection. As a result, the Trust met with Michael Zeuner—a former Senior Executive Partner at GenSpring—to discuss GenSpring’s strategy. Former GenSpring CEO Mel Lagomasino attended one of the introductory meetings as well. At these meetings, Mr. Zeuner indicated that GenSpring’s advantage over the other firms derived from what he called a small “family” oriented office that used an “open architecture,” meaning that it did not use proprietary funds. The cornerstone of GenSpring’s approach was the specialized use of multi-strategy hedge funds as a substitute for the fixed income or the bond portion of their clients’ portfolios.
According to GenSpring, these Multi Strategy Hedge Funds had higher and more consistent returns than bonds, but with bond risk. GenSpring asserted that the Multi Strategy Hedge Funds would behave like traditional bonds in terms of volatility and asset class correlation, but would provide superior returns across all market cycles. The claim asserts that GenSpring also emphasized that this approach had been thoroughly tested under every conceivable market scenario. As a result, the Trust entrusted approximately $10 million to GenSpring Family Offices and requested that capital preservation be the primary goal.
The second of the two new Claims asserts that during the initial meetings with GenSpring, the trustees explained to GenSpring that the funds in the Trust would need to be readily available for other potential business opportunities within the next 6 to 18 months, and therefore the Trusts needed to be invested in safe, liquid investments. In response, GenSpring assured the trustees that it had developed an investment strategy that would provide higher returns than a traditional fixed income strategy with the same risk. GenSpring representatives informed the Trust that its proposed “Strategy” was as safe as it gets. The key component of GenSpring’s “Strategy” was “substituting” Multi-Strategy Hedge Funds and “market neutral” hedge funds for traditional bonds.
Moreover, GenSpring represented that these hedge funds had “bond-like risk with equity-like returns.” In fact, they labeled these hedge funds as “bond risk” investments. Ultimately, the Trust invested $25 million with GenSpring in a strategy that was to have a time horizon of six to twenty-four months and employ the use of mostly Multi-Strategy Hedge Funds as substitutes for bonds and a small amount of equities. The time horizon aspect was important to the Trust because it planned to use these funds in other areas over the next year or two.
Contrary to what the clients requested in each of these separate cases, when the equity markets plummeted in late 2008 and early 2009, the Multi Strategy Hedge Fund investments went down in virtually direct correlation to the stock market. In contrast, traditional bonds (the benchmark used by GenSpring as to the Multi Strategy Hedge Funds) moved opposite of stocks, in accordance with historical norms, and went up more than 5 percent.
According to attorney Allison Ficken of Dovin, Malkin & Ficken, “GenSpring had no reasonable basis to believe that Multi Strategy Hedge Funds like Silver Creek would perform like bonds or provide adequate diversification from equities.” Likewise, attorney Chris Vernon of Vernon Litigation indicated that many GenSpring clients “continue suffer liquidity risk damage because they are saddled with very large investments that they cannot liquidate because of lock-ups.”
Indeed, the Silver Creek Funds (i.e., the Multi-Strategy Hedge Funds discussed above) are “Funds of Funds”, that is, they invested in multiple other hedge funds, each with its own manager(s), many of whom were employing any number of strategies having nothing to do with bonds or fixed income investments. As a result, both of the Claims assert that GenSpring had no reasonable basis to believe that the Silver Creek funds would perform like bonds or provide adequate diversification from equities. Moreover, at the time these investments were made for the Trusts, there was not enough historical data on these multi strategy funds of hedge funds to make reliable assumptions about the composition, risk or return of these funds.
As noted by attorney Ed Dovin of Dovin Malkin & Ficken, “It is truly troubling that GenSpring so boldly and successfully marketed this strategy to lure ultra-high net worth investors away from its competitors by implementing such a flawed and reckless strategy. Once again, we see an investment firm putting its revenue stream ahead of the interests of the investing public.”
On behalf of both clients, the law firms of Vernon Litigation and Dovin Malkin and Ficken have asserted separate claims for breach of fiduciary duty, negligence and breach of contract. The claims pursued in each of these cases are not only for significant damages, but also for rescission of the Silver Creek funds that remain highly illiquid in the Trusts’ portfolios.
The Vernon Litigation and Dovin Malkin & Ficken team are now representing high net worth individuals in an aggressive nationwide and international investigation of GenSpring Family Offices. The team has already filed multiple claims and collectively obtained damage and rescission awards on behalf of two former GenSpring clients well in excess of $5 million.
GenSpring Family Offices is owned by a wholly-owned subsidiary of SunTrust. According to GenSpring, it has more than $17 billion under management and its clients are among the wealthiest families in the world. It has offices in Miami, Florida; Wazata, Minnesota; Nashville, Tennessee; Memphis, Tennessee; Jupiter, Florida; Orlando, Florida; Costa Mesa, California; Atlanta, Georgia; Chevy Chase, Maryland; Greenwich, Connecticut; Charlotte, North Carolina; Saint Petersburg, Florida; Sarasota, Florida; New York, New York; Chapel Hill, North Carolina; and Hickory, North Carolina.
Based in Naples, Florida, the securities attorneys at the Vernon Litigation law firm have conducted aggressive nationwide investigations of hedge funds, structured products, reverse convertibles, municipal bonds, bond funds, hedge funds, non-traded REITs, private equity, EB-5, complex insurance products and strategies, TICS, and various securities fraud cases and Ponzi schemes. The firm’s investigations and advocacy on behalf of investors have been featured in AARP magazine and Forbes. More recently, Vernon Litigation’s GenSpring investigation has been reported in Barron’s.