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In 2006 Hunter Biden, the youngest son of Delaware Senator Joe Biden, needed to find a new line of work.
His job as a federal lobbyist was in danger of conflicting with his father’s latest presidential bid. Joe Biden, now vice president, had himself suggested Hunter find another line of business, according to documents from a 2007 court case.
Joe Biden’s brother, James, was tasked with the job of finding his nephew Hunter employment in the then-booming world of finance. To do so he contacted Anthony Lotito, a self-described financial consultant, who had met James in 2002 and done business with his Pennsylvania-based law firm, Lion Hall. Lotito was soon put in touch with Hunter, and went on to introduce both him and James to John Fasciana, a New York lawyer who could set up the limited liability company needed to help the Bidens buy a hedge fund.
Together the four began planning to purchase New York-based fund of funds Paradigm Capital Management, where Lotito, according to an affidavit later filed by James Biden, said he had been an adviser.
“The prospect of acquiring Paradigm excited Lotito for several reasons,” a 2007 court filing said. “Although the hedge funds managed by Paradigm already had significant assets under management, Lotito believed that the company could quickly expand its network of investors, particularly among public employee pension funds.” With the Bidens onside, Paradigm could presumably use their political leverage to gain more of those public sector pension funds’ business.
Indeed, the Bidens had been put into contact with Lotito in the first place through Thomas Scotto - the highly decorated and politically well-connected former head of the Detective Endowments Agency, an early investment with Paradigm, according to a court document.
Paradigm itself was founded in 1991 by Dr James Park, one of Korean Unification Church founder Reverand Sun Myung Moon’s sons-in-law, and then a professor of finance at Long Island University. Park was a prolific researcher of the hedge fund industry, producing doctoral dissertations referenced in a working paper by former Federal Reserve Chairman Alan Greenspan — a point flagged in a 2005 marketing document from Paradigm.
James Park acted as chairman and chief investment officer for the company and Paradigm’s overall investment strategy drew heavily on Park’s work, according to the marketing document. Part of the fund of funds’ investment process, for instance, involved a “proprietary manager database and index technology system developed by Park, called “PASS”, which allowed the company’s management team to compare hedge funds.
The method appeared to be paying off. Paradigm’ current website boasts that the company’s portfolio of hedge funds has “not suffered a down year since the firm’s inception”. In the 2005 marketing document the fund of funds said it had $1.5bn in assets under management “on behalf of institutional investors, pension funds and high net worth individuals” and was producing an annualised return of about 10 per cent.
Hunter and James Biden were prepared to pay $21.3m for the business, according to court filings.
With their business partner, Lotito, and with Fasciana advising them, the Bidens set up LBB Limited Liability Corporation in April 2006 to buy Paradigm, with initial funding provided by Illinois law firm SimmonsCooper.
But, as they began their due diligence, the buy-out soon dissolved into legal and financial chaos, with the deal between Lotito, Fasciana and the Bidens eventually called off and replaced by a separate purchase agreement. Lotito later filed a law suit against the Bidens alleging they had fraudulently sidelined him from the LBB purchase, and the Bidens filed a counter-claim alleging that Paradigm had been misrepresented to them by Lotito and Fasciana.
In the counterclaim, James Biden alleged that instead of the $1.5bn under management boasted in the Paradigm document and by Lotito and Fasciana, the hedge fund had just $200m-$300m under management, and the returns also “were not as represented to us by Lotito and Fasciana” and the hedge funds did not have $9m in annual management and incentive fees, but $9m in gross annual revenue. Biden also claimed that the holding companies for the funds allegedly had extensive debt, and that James Park “had an apparent substance abuse problem and had been an absentee manager for several years”.
After the due diligence discovery, SimmonsCooper promptly withdrew from the deal, leaving the Bidens owing the law firm $1m, according to James Biden’s affidavit. At the same time, the Bidens also claimed they discovered that Fasciana was awaiting sentencing for a criminal conviction for fraud and Lotito was not a licensed or accredited securities professional or financial adviser as he had claimed to them to be. Lawyers for Lotito said the Bidens’ claim about alleged misrepresentation was “insufficient” because they “cannot tie these alleged misstatements to any loss they suffered”.
By late June 2006, the Bidens had come to the conclusion that Paradigm was worth much less than $21.3m and that they should no longer do business with either Lotito or Fasciana, the court filings say. They began terminating their business relationship, with a payout to Lotito of $250,000.
The Bidens went on to purchase Paradigm later that year through another holding company, BG Equity Partners LLC, for the much-reduced price-tag of $8.1m.
Their hedge fund troubles were not yet over.
Lotito, angry that the Biden’s had reneged on their partnership with him, filed a law suit in 2007, and alleged the Bidens had cut a “secret side deal” with Paradigm’s holding company to buy the fund and force him out of the company. Lotito asked for at least $20m in damages, listing a host of complaints against the Bidens including allegations that Hunter had hired family friends as high-salaried executives and the Bidens cited their “political connections” as reasons not to pay a bill related to LBB’s corporate counsel. Under the LBB buy-out plan Hunter Biden was to be set up as president of Paradigm, with a salary of $1.2m, despite having “no previous experience running a hedge fund”, the suit says.
Weeks after Joe Biden was sworn into office as vice president, the law suit was settled on confidential terms, with the Bidens denying any wrongdoing.
But, the Biden’s ownership of Paradigm was still not secure. Another ownership dispute, that had been ongoing between James Park and his colleagues returned to haunt the Bidens, with a 2008 lawsuit brought by Deutsche Bank executive Stephane Farouze. Farouze had been previously employed by Paradigm. According to Paradigm’s marketing material, Farouze joined the fund in 2003 as managing director of marketing and structured products, leaving in November 2006 to join the German bank as head of fund derivatives.
Farouze alleged that the controlling stake James Park sold to the Bidens was not in fact his to sell, and that a complex series of side-agreements with Park meant he had a claim on the controlling stake. In his affidavit, Farouze claimed the deal amounted to the Bidens effectively “seized control of Paradigm, ran the day-to-day operations of Paradigm as if Plaintiffs never existed and had no ownership interest in Paradigm.”
In their motion to dismiss Farouze’s claim, the Bidens alleged that Farouze did not in fact have a stake at all, arguing that key conditions of the side-contracts between Farouze and Park had never been fulfilled, making the deal void. The Bidens allege that Farouze’s subsequent complaints against them should in fact be taken up with James Park.
The case was also settled early this year.
Affidavit of James Biden - Court document
Affidavit of Hunter Biden - Court document
Summons and complaint of Anthony Lotito - Court document
Counter-claim by the Bidens - Court document
Affidavit of Stephane Farouze - Court document
By Sam Jones, Tracy Alloway and Stacy-Marie Ishmael
First published at 18:38 BST, April 30, 2009
