Hedge Flop Haunts Celebs

In the annals of hedge-fund collapses, Sylvester Stallone is among lucky investors who walked away unscathed -- or so it seemed. In 1997, the actor 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 nobody realized, according to their lawyers, was that Lipper never made all that money. A portfolio manager had inflated profits by at least 40%, 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. (The hedge fund is unrelated to Lipper Inc., the mutual-fund data firm, which is part of Reuters Group PLC.)

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.

http://online.wsj.com/article/SB115621127427241839.html?mod=mkts_main_todays_mkts_tac