Frozen Homm Funds Roiled by Deception of Investors (Update1)
By Richard Tomlinson and Katherine Burton
Oct. 26 (Bloomberg) -- Florian Homm had good news for investors in his hedge fund during a conference call on Aug. 28.
Markets across Europe had been tumbling over the previous six weeks amid fears that the U.S. subprime crisis would spread. The eight equity funds Homm managed from Majorca for Absolute Capital Management Holdings Ltd. were weathering the storm, he said.
``Unless there's some completely unpredictable about-turn in the last remaining days, the returns of the funds are reasonably good -- small losses to small gains,'' Homm said.
Less than a month later, Homm resigned. ``I have become concerned with the performance of certain of our funds,'' wrote Homm, 48, who'd delivered average annual returns of 15 percent on his flagship fund since 2002, in a Sept. 18 letter to shareholders.
Investors dumped Absolute Capital's stock. That day, it lost two-thirds of its value on London's Alternative Investment Market, falling to 118.5 pence from 390 pence. Today, the shares are trading at 68.5 pence. In the two days following Homm's resignation, investors tried to pull out more than $100 million from Homm's hedge funds before the firm limited withdrawals on Sept. 20. Six of Homm's funds are still frozen.
``This came out of the blue completely,'' said Sean Ewing, Absolute Capital's co-founder, two hours after Homm quit. ``I don't know what's behind it, and I'd like to find out.''
Homm's abrupt exit has also piqued regulators' interest. The London Stock Exchange is investigating whether the company broke the exchange's rules on disclosure and trading, according to a person familiar with the matter.
Illiquid Shares
Absolute Capital on Sept. 19 revealed that even though six of Homm's eight funds focused on European stocks, a quarter of all the money was in illiquid shares of U.S. companies with very small capitalizations, known as microcaps.
John Bruhl, an investor in two of Homm's funds, has asked the Grand Court of the Cayman Islands, where Absolute Capital is registered, to liquidate them. His request won't be heard until after Oct. 27, when the company plans to hold an emergency general meeting for investors in four funds with a high concentration of illiquid assets in Grand Cayman.
Absolute Capital is asking investors to approve a restructuring that calls for freezing the funds for one year while the company tries to sell the illiquid shares. A group of investors represented by William Rodger, an attorney at London- based Simmons & Simmons, opposes the plan, Rodger says. He declined to identify the investors.
`Fraud or Not'
``We'll see if there's fraud or not,'' says Renaud Cohard, an analyst at London-based investment firm Carlton Capital Partners LLP, who listened to the Aug. 28 investor call. Cohard, who says he has many unanswered questions about the company, says he has met Homm many times. ``He looked like an honest guy,'' he says.
It isn't the first time Homm, a 6-foot-8-inch (203- centimeter), Harvard-educated German native, attracted the scrutiny of regulators or left investors with big losses. Germany's market watchdog fined him in 2004 for publishing false statements about a listed company, and a Frankfurt court fined him in 2005 for stock manipulation.
Homm ``vigorously contested'' the allegations in both cases, according to documents in Absolute Capital's initial public offering. A European stock fund he ran closed after it lost about 15 percent of its assets in 1995 and invested in at least one U.S. biotechnology stock, prompting shareholders to withdraw their money.
`A Red Flag'
Homm's current penny stock investments are disturbing, particularly because Homm personally owned 50 percent of Hunter World Markets Inc., a Beverly Hills, California-based stock brokerage, says former U.S. Federal Bureau of Investigation agent Ken Springer. Hunter World managed the offerings of many of the U.S. penny stocks Homm had Absolute Capital invest in, according to U.S. Securities and Exchange Commission filings.
``It's a red flag,'' says Springer, who now runs Corporate Resolutions Inc., a New York-based firm that does background checks of hedge funds. ``Clearly there could be a conflict of interest there.''
Repeated calls to Homm's Spanish mobile phone number went unanswered. People who answered the door at C'an Girasol, or Sunflower House, his yellow stucco mansion overlooking Palma, on Sept. 18 said he wasn't there.
Homm's former father-in-law, who lives next door to the house in London where Homm stayed in late September, said Homm was on vacation in Marrakech, Morocco. On Oct. 15, mail addressed to Homm was stacked on a shelf in the vestibule of the house, which belongs to Christian Engelhart, a friend. Engelhart declined to comment.
`Significant Destruction'
Ewing says he's been trying to reach Homm without success. ``There's been significant destruction caused by his sudden departure,'' he says.
Homm's tale is a reminder of the need to do research before investing in the loosely regulated $1.7 trillion hedge fund industry, says Geoff Bobroff, a former enforcement lawyer with the SEC.
``Individuals investing in hedge funds have to focus on things like the prior history of the principals, any conflicts of interest and the owning of illiquid securities, which can give rise to trading and pricing challenges,'' says Bobroff, who now runs a money management consulting business in East Greenwich, Rhode Island.
Until now, Homm has often been in public view. He made headlines in Europe last year when he was shot by a robber in Caracas. Homm claimed to have some high-profile mentors: Peter Lynch, who ran the world's best-performing investment fund for Fidelity Investments from 1977 to '90, and Harvard Business School Professor Michael Porter.
Arrogant vs. Confident
Homm included a letter of recommendation he said was written by Lynch in May 1990 in three Absolute Capital presentation documents. ``Some people may call him impatient and even slightly arrogant,'' the Lynch letter says of Homm. ``Confident would be the appropriate adjective.''
Lynch, 63, hasn't had any relationship with Homm since he left Fidelity, says Deb Pont, a Fidelity spokeswoman. ``A letter purportedly written by Mr. Lynch in 1990 cannot reasonably be viewed as having any relevance to Mr. Homm's current professional ability or credibility,'' she says. Porter, 60, says he doesn't remember Homm.
Homm gave an account of his life in a May 2007 video that Absolute Capital removed from its Web site in September. That tale and the version in Homm's company biography are misleading, says his uncle, Johannes Neckermann.
Played Basketball
Homm's entry in Who's Who in Europe, cited in his official Absolute Capital biography, says he was born in 1959 in the spa town of Bad Homburg, 10 miles (16 kilometers) north of Frankfurt. Neckermann, 65, says Homm was born three miles away, in Oberursel. ``Bad Homburg sounds better because it's a posh suburb of Frankfurt, and Oberursel is not posh,'' he says. He says Homm's father was a plumber.
At 18, Homm played for West Germany's youth basketball team, Neckermann says. Christoph Bueker, a spokesman for Hagen-based Deutscher Basketball Bund, says he can't confirm that because it didn't keep records of who played on the team then.
Neckermann says some members of his family disapprove of Homm and he hasn't seen him for more than 20 years. ``Homm brags about his success, and that is not the Neckermann style,'' he says. ``The ethics of the Neckermann family differs so much from Florian Homm's doings that it would be embarrassing to mention his name with my name or my father's name.''
Wine, Old Masters
Neckermann's father was Josef Neckermann, known in the postwar years as the German mail order king. In 1938, Josef bought the mail order house of Karl Joel, a Jewish entrepreneur in Nuremberg who emigrated to the U.S., Neckermann says. Karl Joel was the grandfather of singer Billy Joel.
In 1977, Karstadt AG -- now known as Arcandor AG --bought 51 percent of Josef Neckermann's company, acquiring the remainder in 1984. Josef died in 1992. Johannes Neckermann owns Neckermann Consulting, a Schuyler Lake, New York-based firm that advises on wine tastings and the purchase of old master paintings.
Neckermann says he last saw Homm in the early '80s, after his nephew moved to the U.S. to attend university. Homm graduated cum laude from Harvard College in 1982 with a major in economics, according to the Cambridge, Massachusetts-based school.
Homm, then 23, joined Merrill Lynch & Co. in New York, where he claimed to have been one of the company's youngest securities analysts. Merrill Lynch confirms Homm worked there from October 1982 to August 1985 but says it doesn't keep statistics on its analysts' ages.
Return to Germany
After Homm left Merrill Lynch, he returned to Harvard, where he earned a Master of Business Administration in 1987, according to Harvard Business School.
``I was privileged to work with Professor Michael Porter at Harvard Business School,'' Homm says on the company video. Harvard says its records show that Porter didn't teach Homm's first-year section and Porter's elective course doesn't appear on Homm's transcript.
Homm then returned to Germany, where he joined the institutional asset management department of Bank Julius Baer (Deutschland) in 1990, according to his company biography. Manfred Piontke, who worked with Homm in Baer's Frankfurt office, says Homm quit in 1992 because of a company restructuring. Parent company Julius Baer Holding AG, based in Zurich, can't confirm that information because its personnel records only go back 10 years, spokesman Martin Somogyi says.
In 1992, Homm became managing partner of Tweedy Browne Europe GmbH in Frankfurt, where he worked for about a year, according to the company.
Novelty of Funds
Homm entered the burgeoning hedge fund industry in 1993, when he set up Value Management & Research AG with Kevin Devine, an American whose sister Homm had married in Boston in 1989.
Devine, 47, chief executive officer of Kronberg, Germany- based VMR, declined to comment for this article. (Homm and Susan Devine were divorced in April. Susan, 45, didn't return phone calls to her Naples, Florida, home.)
In 1993, about $170 billion was invested in hedge funds worldwide -- less than 110 of the amount in 2007, according to Chicago-based Hedge Fund Research Inc. Only a handful of companies ran hedge funds specializing in European shares.
A German managing a European hedge fund was even rarer, according to two investors in Homm's European Value Fund who asked not to be named. That novelty attracted European and U.S. clients, who eventually put a total of about $250 million in the fund, the two investors say.
Money Withdrawn
They say Homm bought shares of European small-cap companies, which he argued were undervalued, while betting that the prices of large-capitalization European stocks would fall.
The plan failed. Shares of big European companies, as measured by the Dow Jones Stoxx Large (Price) Index, climbed almost 17 percent in 1995, creating losses on Homm's short sales. The Dow Jones Stoxx Small (Price) Index, which measures European small caps, fell 8 percent, creating more losses for Homm.
Homm's fund tumbled about 15 percent that year and redemptions soared, the investors say, forcing Homm to close the fund. One investor says he also withdrew his money because the fund had bought stakes in at least one tiny U.S. biotechnology company that didn't fit with the fund's stated style of investing in European value stocks.
Chopin and Sand
``Any time an investor does due diligence, he has to be concerned if there is style drift,'' says Scott Berman, an attorney at Friedman Kaplan Seiler & Adelman LLP in New York who represents hedge fund clients.
VMR went public on the Frankfurt stock exchange in October 1998, raising the equivalent of $18.3 million. Its market value peaked at 424.2 million euros ($407 million at the time) on March 30, 2000.
Homm quit VMR in 2001 and moved with his wife and two children to Majorca, a Mediterranean island off the coast of Spain that attracts thousands of U.K. tourists and a handful of celebrities and wealthy expatriates. Actors Catherine Zeta-Jones and Michael Douglas have a home on the island. Poet Robert Graves, composer Frederic Chopin and writer George Sand have all lived there.
Homm bought a five-story mansion in Establiments, a hilltop village outside Palma. There he reconnected with Ewing, a Donegal, Ireland, native who had run a fund management company in which Homm's VMR had invested in 1996. In 2002, after selling the fund company, Ewing moved to Majorca for lifestyle reasons, he says.
Patience Lacking
``Florian contacted me, and we met up and we had a drink or two,'' Ewing, 42, says. Homm told Ewing he was planning to start a private investment office called FM Fund Management Ltd. Ewing agreed to invest some of his own money.
From 2002 to '04, Homm operated with two traders, Guillermo Hernandez and Darius Parsi, working at first from a converted billiard room in C'an Girasol.
The Internet connection was painfully slow, recalls Hernandez, 43, who left Absolute Capital in 2006 and now works for Piontke's firm, FPM Frankfurt Performance Management AG, in Frankfurt.
He says Homm took little time to coach his traders. ``He never had the patience to sit beside you and explain how the investment world functions,'' Hernandez says.
Analyst Reports
All the same, he says, he learned a lot from watching Homm. ``He spent many hours on his computer at night looking for short- sell ideas,'' Hernandez says. ``He was very investigative, a bit like a good journalist, going to as many sources as possible in order to make up his mind.''
In March 2002, Homm started his Absolute Return Europe Fund, which focused on long and short positions in small- and medium- size companies in Germany and countries in central Europe.
The fund returned about 15 percent a year on average as of Aug. 31, when it had $490 million, compared with a 9 percent average for other funds, according to the CSFB/Tremont index. From Jan. 1 to Sept. 30 of this year, the fund lost 12.2 percent, according to Absolute Capital.
While Homm was picking stocks for FM Fund Management, he was also writing analyst reports for another company, United Zurichfinance AG. Homm is listed as a former director of UZF in Zurich's commercial registry. In 2003, Homm held an undisclosed substantial financial interest in UZF, according to Absolute Capital's 2006 AIM stock market admission document.
Short Position
Ullrich Angersbach, Absolute Capital's head of investor relations, was also a director of UZF in 2003, according to corporate records in Zurich's cantonal commercial registry. Angersbach, who also heads Absolute Capital's Zug, Switzerland, office, declined to comment.
In 2002, Homm wrote a research report for UZF with a strong sell recommendation on WCM Beteiligungs & Grundbesitz AG, a publicly traded Frankfurt-based industrial holding company. Homm's report didn't mention that his fund had a short position in the company.
WCM protested, and in December 2005 a Frankfurt court fined Homm 50,000 euros for failing to declare a self-interest. It ordered Homm to pay most of the fine to local charities.
In 2003, Homm wrote another research report for UZF on Sixt AG, a publicly traded car rental company based in Pullach, Germany. BaFin, Germany's Federal Financial Supervisory Authority, ruled that Homm had made incorrect statements about Sixt's accounting that might have encouraged investors to sell the stock.
Fined by BaFin
In 2004, BaFin fined Homm 70,000 euros for publishing false information. Spokesmen for BaFin, Sixt and WCM declined to comment. Homm denied the charges. Ewing says Homm only paid the fines when pressured to do so by the company's board. He says Homm chose a dog shelter in Frankfurt as the charity recipient.
Homm first got widespread publicity in 2004, when FM bought 26 percent of Borussia Dortmund GmbH, a soccer team that plays in Germany's first division.
``His investment was partly about self-marketing, because it got his name into the German sports press,'' says Robin Steden, a spokesman for the club. Since then, the club's shares have tumbled to 1.58 euros from a high of 2.79 euros on May 10, 2004, shortly after Homm bought in.
Steden blames part of the share price decline in the week following Homm's resignation on Absolute Capital's selling its stake without letting Borussia know.
``We are a microcap company, and we are not amused that someone is selling such a large stake on the open market, because it is definitely too much for the development of the shares,'' Steden says. Absolute Capital sold some of its Borussia stake in September and will comply with all regulatory disclosure requirements, says Tim Robertson, a spokesman for the company at Cardew Group, a London-based public relations firm. He declined to say how much it sold.
Investing in U.S.
In August 2004, four months after Homm invested in Borussia, he and Ewing created Absolute Capital, which absorbed FM. The company's goal was to eventually invest in both equity and fixed- income markets, Ewing says. ``We agreed that Florian would run the money, and I would basically do everything else,'' he says.
Absolute Capital marketed its funds as focused on value opportunities in Europe, according to investors who say Homm marketed to them.
All the same, the funds were investing actively in the U.S., SEC filings show. In September 2005, Homm's Absolute Return Europe fund invested in a $48 million private share offering by Penthouse Media Group. Homm's wife, Susan, also invested in the offering.
Marc Bell, CEO of the company's parent, New York-based Penthouse International Inc., says Homm still has a stake in the company. He declined to say how much.
Beverly Hills Address
Starting in 2005, Absolute Capital also invested in stock offerings of small U.S. companies including Logistical Support Inc., an airplane parts supplier in Chatsworth, California, according to SEC filings.
The companies were underwritten by Hunter World Markets, the brokerage that was 50 percent owned by Homm, according to a May 6, 2005, SEC filing. SEC filings as recently as Oct. 4, 2007, show Absolute Capital owning stakes in companies that Hunter World Markets underwrote.
At the end of 2006, two of Absolute Capital's funds together owned a 22 percent stake in Logistical Support, which had net income of $135,741 that year.
In several of the regulatory documents, the Absolute Capital funds share the same address in Beverly Hills as that of Hunter World Markets, which has also operated under the name VMR Capital Markets US, according to the National Association of Securities Dealers.
`Code of Conduct'
Todd Ficeto, co-owner of Hunter World Markets, declined to comment on Homm's relationship with the brokerage firm. Ficeto has been fined $62,000 by the NASD for three separate infractions, according to the NASD. In 1996, Ficeto was suspended for two years from recommending any transactions in penny stocks after he failed to provide customers with adequate information and disclosure, the NASD says.
Ficeto didn't respond to phone messages and e-mailed requests for comment about the NASD infractions.
Ewing and Jonathan Treacher, Absolute Capital's CEO since July, say they have never heard of Hunter World Markets. Absolute Capital had strict rules about company employees trading on their own account, Ewing says.
``We had a personal trading code of conduct that everybody signed up to, including Florian,'' he says. ``People were obliged to provide information about those trades and any trades they were doing for either themselves or their family.'' Ewing says he didn't track Homm's individual investments or monitor his movements.
On The Road
Homm was on the road an average of 200 days a year, mostly in Europe, according to his 2007 divorce documents. On one trip to Caracas in November 2006, Homm was shot as he traveled to the city from the airport by a robber who stole Homm's wallet and Rolex watch, says Ewing, who says Homm later showed him the bullet wound.
Ewing says he always wanted to reduce Absolute Capital's dependence on Homm's stock-picking skills and broaden the range of funds held by the company. So, in January, Absolute Capital bought Argo Capital Management Ltd., a London-based hedge fund firm specializing in emerging-market fixed-income funds.
Absolute Capital paid 50.5 million pounds ($102.5 million) for the three Argo fixed-income funds, which had about $1.15 billion in assets at the end of July, according to the company's newsletter. Argo's former manager, Andreas Rialas, is now a director of Absolute Capital and its co-chief investment officer, a title he shared with Homm.
Resignation Letter
In his Sept. 18 resignation letter, Homm promised that he would keep a role at the company. ``I remain the largest single shareholder, and I intend to continue to fight for shareholder value in ACMH,'' Homm wrote.
Three days later, Homm sold most of his shares to Rialas. Once again, Florian Homm said one thing and did another. For investors hoping to get their money out of his funds, that last failure to keep a promise already is proving costly.
To contact the reporters on this story: Richard Tomlinson in London at rtomlinson1@bloomberg.net ; Katherine Burton in New York at kburton@bloomberg.net
Last Updated: October 26, 2007 11:09 EDT
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