Citadel caper - an anticlimactic resolution

One-Man Assault on Citadel Ends in Quiet Retreat

January 22, 2007, 11:05 am

An unusual lawsuit involving a secretive hedge-fund chief has come to a fittingly enigmatic finale. Last June, a Florida man claiming to be the mentor of Kenneth C. Griffin accused him of defrauding him and illegally breaking their partnership to form Citadel Investment Group, a hedge fund that now oversees more than $12 billion in assets.

On Sunday, however, Citadel announced that the suit, filed in Illinois state court, had been dropped. Why? The plaintiff, Rush E. Simonson, said only that it was “the right thing to do.”

Citadel said in its statement that Mr. Simonson took no compensation or settlement to drop the suit. Moreover, he had the suit dismissed with prejudice, preventing it from being raised again. In a rare public comment, Mr. Griffin said: “Mr. Simonson’s withdrawal of his allegations and the dismissal of this case are a testament to the power of the truth. The disposition of this matter is a triumph of justice.”

In a letter sent to Mr. Griffin Jan. 17 (and copied to the state court), Mr. Simonson wrote: “I know that the pursuit of this matter has cost you both time and money. I have appreciated your efforts to be forthright and cordial in resolving this matter and I apologize for any harm the filing of this suit has caused you.”

Reached by phone on Sunday, both Mr. Simonson and his Chicago-based lawyer, Kenneth A. Wexler, declined to comment to DealBook.

With more than a thousand employees around the world, Citadel is one of the largest hedge funds, which are firms that manage money for wealthy investors and institutions. Late last year, it acquired Amaranth Advisors‘ energy-trade portfolio and held an unprecedented $500 million bond offering.

Mr. Griffin, 39, founded Citadel while still a student at Harvard and has since made Forbes’ 400 Richest Americans list. Mr. Griffin shuns publicity, though he is a top art collector who donated $19 million to the Art Institute of Chicago. (The museum’s new modern wing will be called the Kenneth and Ann Griffin Court.)

In his now-withdrawn lawsuit, Mr. Simonson suggested that Mr. Griffin’s silence stems not from aloofness but from a desire to keep quiet about Citadel’s origins. In court filings, Mr. Simonson said that he first befriended Mr. Griffin in 1982 as a computer salesman. The two struck up a friendship and a business partnership, whose core was a convertible-arbitage operation. Mr. Griffin provided the trading savvy, working both out of his Harvard dorm room and at home in Florida, while Mr. Simonson created the computer program that served as the nascent hedge fund’s technological backbone, according to the suit.

Mr. Simonson claimed that he drew in the first investors and gave up a “promising” position at a Palm Beach, Fla., investment firm.

According to the suit, Mr. Griffin went around Mr. Simonson’s back and struck a deal with a prominent Chicago investor in the late 1980s. As Mr. Griffin and Mr. Simonson began to unwind their partnership, the suit claimed, the Harvard graduate instead began to lay the foundations of what would become Citadel. In doing so, Mr. Griffin improperly took the program that Mr. Simonson had created, the suit had alleged. Mr. Simonson also said in his lawsuit that Mr. Griffin did not give him a cut of the profits Citadel soon began to make.

From Mr. Simonson’s complaint:

As Griffin continued to engage in convertible hedge fund investing, he was careful to avoid revealing his true past and his business relationship with Simonson. Griffin knew that his success depended on the trust of his investors. Griffin was aware that if those investors discovered the manner in which he had dealt with Simonson they could withdraw from further dealing with him. Therefore, despite achieving success and acclaim within the confines of the hedge fund industry, Griffin actively concealed his past.

Remarkably, Mr. Simonson said that he only discovered Mr. Griffin was still in the hedge fund business in 2003 — when he flipped through a copy of Fortune at his dentist’s office and saw a profile of the Citadel chief.

Mr. Griffin acknowledged that he and Mr. Simonson had once been partners — “I have fond memories of my days in college when I would run back to my dorm room to execute trades on behalf of the partnerships we had formed,” he said in Citadel’s statement Sunday — but said that the termination of their partnerships was legal and orderly.

–Michael J. de la Merced

Go to Citadel Press Release »

Go to Letter from Rush E. Simonson to Kenneth C. Griffin (Filed with Illinois State Court) »

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