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Evergreen firm sues European hedge fund

Executive accused of fraud scheme with penny stocks

By James Paton, Rocky Mountain News (Contact)

Published July 2, 2008 at 10:56 p.m.

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An Evergreen investment firm has accused the co-founder of European hedge fund company Absolute Capital Management of enriching himself in a fraudulent scheme involving penny stocks.

The Cascade Fund, operated by White Peaks Asset Management, filed a lawsuit last week in U.S. District Court in Denver against Florian Homm, Absolute Capital and other individuals.

"Part of the story has yet to be told, but from what we've been able to find out so far it looks very, very dirty," said Daniel Wake, a lawyer with Sander Ingebretsen & Parish in Denver who is representing the Evergreen fund firm.

The case is a small chapter in a hedge fund tale that has sparked international headlines.

Homm, who also had been Absolute's chief investment officer, resigned abruptly last September. Then investors learned he had invested roughly $500 million in non-liquid penny stocks, triggering a flurry of redemption requests, according to the lawsuit.

Homm "secretly steered" investor funds into buying the "wildly speculative" penny stocks through Hunter World Markets, a California-based brokerage firm he half-owned, the lawsuit stated.

"Homm's transactions generated huge profits for Hunter in a variety of ways, which in turn generated secret profits for Homm," according to Cascade, a fund that invests in other hedge funds.

The Cascade Fund had roughly $1.5 million in the Absolute Capital hedge funds, documents show.

In 2005, the Cascade Fund sued Tenet Asset Management, claiming the Tennessee firm made a reckless bet that shares of Google would fall. A judge ultimately ordered the firm to pay the Evergreen fund a $1 million award.

In the case of Absolute Capital, Homm used the funds to make self-serving investments in a range of stocks, including Universal Guardian Holdings, Logistical Support, Micromed Cardiovascular, Quest Group International, Java Detours, Pro Elite and Berman Center, the lawsuit said.

The fund manager strayed from its mandate by parking so much money in penny stocks, the Cascade Fund alleged.

In the case of Logistical Support, Hunter had a large stake in the company, meaning Homm "used investor money to prop up a penny stock in which he was beneficially a large personal shareholder," according to Cascade.

An official with the Cardew Group who represents Absolute Capital - reached late Wednesday in London - said he could not comment on the lawsuit.

Absolute Capital has new management. It also has moved to restructure the funds and has suspended investor redemptions.

The Cascade Fund named the company as a defendant, too.

"We believe they are responsible," Wake said. "They should have known all along what he was doing and what the asset composition of each of the funds was. It's not just Florian Homm."

The Evergreen firm was not the only one to target Homm. Colorado oilman Jack Grynberg sued Homm earlier this year, but documents show it was dismissed.