Stillwater Hits Snag in Restructuring Effort

Investors in asset-based lending vehicles run by Stillwater Capital may have to wait another six months before redeeming their investments.

A year ago, the New York firm struck a deal to convert limited-partnership interests in two hedge funds and a fund of funds into restricted shares in a publicly traded company known as Gerova Financial. Under the deal, Stillwater investors were told they could begin selling their Gerova stock in January 2011.

Last month, however, Gerova disclosed in regulatory filings that the timetable for freeing up Stillwater investors was being pushed back. Why? Because Stillwater was five months late in filing audit reports, and more recent acquisitions by Gerova had complicated efforts to properly value the company.

Reached this week, Stillwater founder Jack Doueck acknowledged it could be another six months before investors are permitted to sell their Gerova shares. Meanwhile, financial analyst Dalrymple Finance issued a report last week accusing Gerova of mismanagement and fraud. In a Jan. 18 press release, Gerova denied the allegations and said it had hired corporate sleuth Kroll to investigate possible market manipulation by Dalrymple.

Like other asset-based lending managers, Stillwater got caught in a liquidity squeeze during the financial crisis. Unable to meet withdrawal requests, the firm suspended redemptions from three vehicles: Stillwater Asset-Backed Fund, Stillwater Real Estate Fund and Stillwater Market Neutral Fund, which invests in other asset-based lending hedge funds.

Rather than sit on the funds' assets indefinitely, Stillwater entered into the deal with Gerova, which was founded in 2008 by Gary Hirst, head of Boca Raton, Fla., hedge fund operator Hirst Financial. Hirst incorporated Gerova as an insurance company with the idea of buying up assets from struggling insurers and hedge fund managers. Since signing the deal with Stillwater on Jan. 20, 2010, Gerova has acquired the assets of Weston Capital's Wimbledon funds.

Last week's report from Boston-based Dalrymple shed an unwelcome light on Gerova and Stillwater. The little-known stock-analysis firm, run by husband-and-wife team Keith and Victoria Dalrymple, accused both firms of misleading investors. Dalrymple disclosed that it is shorting Gerova's stock.

Stillwater plans to post a lengthy response to the Dalrymple report on Gerova's website. In a telephone interview, Doueck said the report is riddled with inaccuracies. “Ultimately,” he said, “the truth will come out. We have a good business and the short sellers aren't going to win.”

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