Hollywood stars under scrutiny for “unjust enrichment” in hedge fund fraud

Some of Hollywood’d top stars including Sylvester Stallone, John Cusack and Julia Roberts are facing legal action over the money they made from a collapsed hedge fund for classic 1987 film Wall Street. The movie starred Michael Douglas and Charlie Sheen as a young stockbroker desperate to succeed at any cost. They are being sued for "unjust enrichment" after investing in the movie advisor Ken Lipper's scheme, and pulling out with huge profits ahead of its 2002 collapse over fraud.In 1997, Stallone invested $2.5 million in a private investment partnership called Lipper Convertibles. Four years later, with his statements showing the investment had swelled to about $3.8 million, he cashed out. Fellow actor John Cusack also walked away with big gains, as did former New York City Mayor Ed Koch and a trust fund for the children of investor Henry Kravis.
Now, they are all being sued to give money back.What none realized, according to their lawyers, was that Lipper never made all that money. A portfolio manager had inflated profits by at least 40 percent, Lipper discovered in 2002. "We want all the money to be put back in the pool, so we can divvy it up equitably among all the partners," says Thomas Dubbs, an attorney representing the federal trustee overseeing Lipper.In lawsuits filed in recent months in New York state court in Manhattan, the trustee, Richard Williamson, charges the investors who got out with "unjust enrichment." He wants them to return more than $100 million, including $1.3 million plus interest from Mr. Stallone alone.Stallone and Cusack, in court documents, say they were unaware of the fraud and didn't harm fellow investors. In an interview, Mr. Koch, who now works as an attorney at a private firm, says he intends to keep his profits, which amount to about $1 million, including interest. "It's just wrong," he says.The battle highlights a trend emerging from the boom in hedge funds, which now control assets of more than $1 trillion for wealthy investors and institutions. In the wake of some failures, those investors who lost money are chasing those who cashed out. However, there is little precedent in terms of applying this legal argument to failed hedge funds. As a result, it remains to be seen whether the new cases have any success.Mr. Cusack's Lipper investment, which totaled $300,000, was made in the mid-1990s, court documents show. In 2000, he was given $537,705, or an alleged overpayment of $166,123 plus $67,025 interest.Those cases, like the Lipper case, are pending in state Supreme Court in Manhattan. Individuals who profited "should be sharing the pain," says Jeff Marwil, the federal trustee in charge of liquidating Bayou. "Our goal is to equalize in a fair and equitable fashion."In the Lipper case, the fund's namesake, Ken Lipper, made many connections working as a former deputy under Mayor Koch, and as the author of the novel "Wall Street."Among numerous prominent investors was Mr. Kravis's children's trust, which court documents show made a $2.6 million investment in 1995. In 2001, the trust was paid a profit of $2.8 million.It wasn't until two years later that Lipper sent the letter to investors saying that it had discovered that the profits had been inflated by more than $300 million. A portfolio manager, Edward Strafaci, pleaded guilty in 2004 to a federal charge of securities fraud and was sentenced to six years in prison.Given the revised figures, the lawsuit filed last year by Mr. Williamson says, the Kravis trust should have received only $712,346. Thus, it "erroneously" received a $2.17 million windfall that "greatly exceeded the value" of its interests. The Kravis trust has filed a motion to dismiss that suit.