Magnolia Capital Advisors, which was reportedly told to liquidate up to USD120 million in positions by Bear Stearns, its prime broker, may have tried to end-run the order by effectively striking a repo agreement. Don Reinhard, ceo of the Tallahassee-based hedge fund, did not reply to a series of phone calls and e-mails seeking comment. Bear Stearns MBS chief Tom Marano declined to comment.
An individual involved with the trades says that Reinhard initially complied with Bear Stearns' order by selling the paper into the marketplace and booking the trade as a sale. But then Magnolia allegedly negotiated directly with WRH Mortgage of St. Petersburg, the money manager purchasing the bonds, to effect a series of repurchase agreements for the approximately USD120 million of CMOs.
WRH had no knowledge of Bear Stearns' forced sale, the person said. When the repurchase agreement trade ticket was submitted to Bear Stearns' back office, it declined to recognize the trade, forcing WRH to take ownership of the bonds. It could not be learned what action, if any, Bear Stearns is planning to take against Magnolia. WRH founder William Hough was out of the office and unavailable for comment, according to Joe Waechter, a portfolio manager at the firm, who declined comment. WRH has reportedly made no decision regarding any potential legal actions it might pursue.
