Bloomberg News

Hedge Fund Must Pay Wachovia $2.1 Million Over Swap Dispute

September 30, 2011

(Adds deal details starting in the seventh paragraph.)

Sept. 30 (Bloomberg) -- An Isle of Jersey-registered hedge fund was ordered to pay Wachovia Corp., the bank now owned by Wells Fargo & Co., $2.1 million in a dispute over a credit- default swap.

U.S. District Judge Laura Taylor Swain in Manhattan determined in an order yesterday the amount VCG Special Opportunities Master Fund Ltd. must pay after ruling in Wachovia’s favor last year. Swain had also ruled against VCG’s claims that the bank cheated it by forcing it to make higher margin payments than necessary on the swap.

The court “grants Wachovia’s motion for an award of the full amount of its claimed damages, attorneys’ fees and expenses,” Swain wrote yesterday.

Swain had ruled last year that Wachovia’s calculation of its exposure to a collateralized-debt obligation the swap covered didn’t violate “good faith and fair dealing” by determining VCG owed more in collateral than the swap’s $10 million value.

The $2.1 million includes $1.02 million Wachovia was owed, $1.03 million in legal fees, and interest, Swain said.

Steven Mintz, a lawyer for VCG at Mintz & Gold LLP, didn’t immediately return a call for comment on the decision.

Sold Protection

Wachovia and VCG, controlled by Delray Beach, Florida-based Vanquish Capital Group, entered into the swap in May 2007. VCG sold protection against a default by a collateralized-debt obligation in exchange for an annual premium payment of 2.75 percent of the swap’s face value.

CDOs repackage bonds and other assets into new securities. Neither Wachovia nor the hedge fund owned the CDO.

Wachovia told VCG it wouldn’t have to post margin beyond the initial $750,000 unless the underlying collateral defaulted, the hedge fund said in court papers. Instead, Wachovia demanded another $320,000 a few weeks after the initial payment and a total of $8.92 million over five months, according to VCG’s amended complaint filed in 2008 in Manhattan federal court.

VCG, formerly called CDO Plus Master Fund Ltd., sued rather than pay a further demand of $550,000, arguing it would push its payments to more than $10 million.

Swain found that under the deal’s terms, the total amount of collateral the hedge fund could owe was the initial $750,000 plus the $10 million face value.

The hedge fund never offered any evidence to dispute the valuation, the judge said.

Credit-default swaps are financial instruments used to speculate on a borrower’s creditworthiness or to hedge against losses. The contracts pay the buyer face value for the underlying securities if the company fails to adhere to its debt agreements.

The case is CDO Plus Master Fund Ltd. v. Wachovia Bank, 07- 11078, U.S. District Court, Southern District of New York (Manhattan).

--Editors: Mary Romano, Fred Strasser

To contact the reporter on this story: Thom Weidlich in Brooklyn, New York, federal court at tweidlich@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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