The Case of the Missing Fund Manager and the Penny Stocks

Daniel Bieri and Athanasios Ladopoulos may be wondering just what they've gotten themselves into.

They are the two executives hired last month by the battered hedge fund Absolute Capital Management. They were the first senior level employees hired since the firm nearly imploded last September when its co-founder and chief investment officer Florian Homm abruptly quit.

"People recognize we have a future," said Jonathan Treacher, AbCap chief executive at the time. "We have been hammered, we are battered and bruised, but we have survived the storm."

But sometimes it's what comes after the storm that ends up destroying you. Just ask New Orleans. Treacher, perhaps foreseeing this, has since stepped down from the C.E.O. post after less than a year on the job.

And last week, an investor in Absolute Capital funds sued the firm and four of its former executives, including Homm, of misrepresenting itself to potential investors and artificially inflating the values of its funds.

Colorado-based fund-of-fund manager White Peaks Asset Management, which put about $1.5 million into AbCap's funds, alleges that Homm invested huge amounts in illiquid penny stocks for the purpose of padding his own pockets. He made these investments through a brokerage he allegedly partly owned.

That Homm is being sued does not come as a surprise. Absolute Capital has acknowledged the funds' holdings and launched an investigation into Homm's investing activities.

A Barron's article last month detailed the colorful financier's relationships with cohorts and clients. Homm is reportedly flying well below the radar, as no one has been able to locate him in recent months.

But the problem for Absolute Capital, of course, is that it, too, must fight this class action suit. White Peaks says the firm is responsible for allowing the deception to happen.

AbCap can't really afford to fight a lawsuit right now. Although it claims to be getting back on its feet and earning returns for its funds this year, it has a long way to go.

Just last week, its shares were suspended by the Alternative Investment Market where they trade because the firm has not been able to produce audited 2007 financials.

And in an irony of all ironies, the trading was suspended with AbCap shares at 8.5 pence, which comes out to about 17 cents per share.

That's just the kind of stock Homm would have loved.

by Megan Barnett