Tony Hedge Fund Runs Aground
Palm Beach's Wealthiest Invested
In KL Financial, but Money Is Gone;
Talk of the Country Club Crowd
By ROBERT FRANK
Staff Reporter of THE WALL STREET JOURNAL
March 2, 2005; Page C1
PALM BEACH, Fla. – A hedge fund that counted some of Palm Beach's richest residents as investors has shut down amid an investigation by the Securities and Exchange Commission and the Justice Department.
The hedge fund, called KL Financial Group, had assets of more than $200 million. It has told investors that it ran out of funds because of heavy trading losses, according to attorneys and clients involved in the fund. The SEC plans to file a temporary restraining order this week to freeze any assets left in the fund, according to people familiar with the investigation.
Officials from the Federal Bureau of Investigation started combing the company's West Palm Beach, Fla., headquarters this week to investigate whether any of the funds were improperly siphoned from the fund for personal gain.
Hedge funds have soared in popularity with wealthy and institutional investors. The explosion of new funds has attracted billions of dollars, and with lots of money chasing similar themes, making money has gotten tougher. As a result, many funds have borrowed heavily to leverage their bets in a bid to increase their returns. Others have taken on more risk or drifted from the strategies they vowed to follow for investors. The result: Some funds have stumbled in recent months.
KL has kicked up a storm in Palm Beach, the plush beach retreat for some of America's richest families. The blowup was the talk of the lunchtime crowd at the Palm Beach Country Club, which counts some of the island's newer wealthy and aggressive investors as members.
"A lot of people in this town lost serious money," says Gary A. Klein, a Boca Raton attorney who represents 20 KL investors with between $15 million and $20 million in the fund.
At least one investor in the fund lost $25 million, while another lost $12 million, according to people close to the investigation. At least three professional golfers were investors in the fund, although their names weren't made available, these people say. The fund was run by John Kim, a Korean trader who founded the firm in the mid-1990s in California, according to Mr. Klein. Mr. Kim, who lives in Jupiter, Fla., couldn't be reached to comment yesterday.
One of the fund's partners was Ron Kochman, a trust and estates attorney in Palm Beach who steered clients to the fund. Mr. Kochman also invested in the fund. "I'm going through a very tough time, Mr. Kochman said. "My clients and I have lost everything."
Mr. Klein and other investors say Mr. Kim has been meeting with clients at his home to try to assure them that he will try to get their money back. Mr. Kim has also asked the investors for further funding to start a new fund to make back the losses, Mr. Klein and others say.
KL's offices, eight floors above Mr. Kochman's law practice in a tony office tower in West Palm Beach, were closed yesterday and visitors weren't allowed onto the floor. KL had 30 traders at its offices, as well as support staff. It is unclear when the investigation started. But last week, SEC officials visited KL's offices and started gathering records. FBI officials visited the offices Monday and officials were continuing to comb the office for information yesterday, according to Mr. Klein and officials at the office building.
Mr. Kim was a charismatic stock trader who impressed investors with his energy and bold market predictions, according to Mr. Klein, who used to work in the enforcement division of the SEC, and several KL investors. After founding the firm in California in the mid-1990s, Mr. Kim later moved KL's headquarters to Palm Beach.
Mr. Kim often invited prospective investors to watch him trade stocks on his bank of computer screens. Many clients observed Mr. Kim rack up gains of $1 million on his screen in a single morning, Mr. Klein and others say. They were also attracted by the fund's oversize returns: Last year it told investors it earned a return of 40%, after earning 70% in 2003.
Last year, the fund launched a new fund called Ursa Major, or "the Great Bear" fund, which was betting on a decline in the U.S. stock market. During a presentation to Palm Beach investors in June, Mr. Kim said the fund would take advantage of a predicted "violent downward movement in the equities market in a short period." The Dow Jones Industrial Average has risen 3.8% since June 30.
Mr. Kochman, who handles estate planning for some of Palm Beach's richest clients, was brought on as a partner and used his connections to steer Palm Beach's wealthy into the fund. Mr. Kochman says he did steer clients into the fund, but he declined to elaborate.
Mr. Kochman, 53, co-founded the law firm Kochman, Braun & Ziska in 1999. Aside from handling trust and estate planning, Mr. Kochman also has done legal work on several large real-estate deals in Palm Beach, including the sale of the Kennedy estate to New York banker John K. Castle in 1995. According to Florida bar rules, Mr. Kochman isn't permitted to steer clients into an investment in which he is a partner without disclosing his interests in writing. It is unknown whether Mr. Kochman made that disclosure and Mr. Kochman wouldn't comment on the issue.
Write to Robert Frank at robert.frank@wsj.com
