SEC to investigate claims that LTCM breached rules

AMERICA'S SECURITIES and Exchange Commission has launched a preliminary inquiry into allegations that Long-Term Capital Management breached US securities law by not disclosing the extent of its difficulties when it tried to raise capital from its investors in an 11th-hour attempt to stave off collapse last September.

The hedge fund, which was founded by former Solomon Brothers trader John Meriwether, was bailed out to the tune of $3.75bn by a consortium of 14 banks on the prompting of the US Federal Reserve in September. They included Barclays and Wall Street finance houses Goldman Sachs and Merrill Lynch.

The SEC inquiry was prompted by concerns that Mr Meriwether did not make it clear in a letter to investors asking for more funds that the money was needed to service open market positions worth more than $100bn and that without fresh money the fund would collapse.

LTCM said yesterday it was satisfied that all the documents it had issued to investors were "in full compliance with all applicable laws, rules and regulations".

The SEC has yet to decide whether to launch a formal investigation which would allow its enforcement staff to issue subpoenas compelling those involved to give evidence.

"All fund-raising efforts in August and September 1998 were done on a private placement basis and were confined to a fairly small group of sophisticated investors, most of whom are already investors in the fund," an LTCM spokesman said yesterday.

He added that LTCM's situation was well known to investors as a result of the letter Mr Meriwether sent to investors on 2 September.

"All prospective investors were invited to discuss the situation with authorized persons at LTCM or to visit the offices in Greenwich for an in-depth valuation and many took the opportunity to do so," he said.

The spokesman added that investors were told that a "supplemental document" giving more precise information about the state of the fund was promised but was never needed since no money was raised.