By Rob Copeland
Emanuel "Manny" Friedman is willing to do what other millionaire
hedge-fund managers would rather avoid: dial for dollars.
Call into one of his quarterly portfolio updates as a
noninvestor and a few minutes later you are apt to get a quick
private call from Mr. Friedman himself offering up his personal
line for follow-ups, according to people familiar with the firm.
Ignore the pitch, and he will ring again the next time you call in
and again the next.
With a series of unconventional tactics, Mr. Friedman has built
a more than $6 billion hedge-fund firm and earned his investors,
including clients of Blackstone Group LP, far-above-average
returns.
He has turned heads beyond the numbers. The past two years at a
swanky Las Vegas hedge-fund conference, he wore a T-shirt featuring
a butterfly, skull and crossbones and cheetah. The image, Mr.
Friedman said, is a representation of the struggle between good and
evil.
The former co-founder of investment bank Friedman, Billings,
Ramsey Group Inc. landed in the headlines recently for earning some
of the biggest profits from the U.S. government's bailout of small
banks following the 2008 financial crisis.
But Mr. Friedman's next act may be his most unorthodox: His
Arlington, Va.-based EJF Capital LLC has raised hundreds of
millions of dollars for a new litigation-finance arm that will lend
to law firms pursuing class-action injury lawsuits, people familiar
with the firm said. The firms will repay EJF at hefty interest
rates as they earn fees from settlements and judgments.
The suits include those related to transvaginal mesh, a medical
treatment that props up organs protruding into the vagina, and
Risperdal, a former top-selling Johnson & Johnson schizophrenia
drug that causes the abnormal development of breasts in some men,
people familiar with the firm said.
That is a new arena for a manager who made hundreds of millions
of dollars after the financial crisis by buying mortgage
securities, including risky ones his own firm described as "dirty
pools," and later became one of the biggest hedge-fund purchasers
of the federal government's investments in smaller U.S. banks,
investors said. In some instances, EJF profited when it sold the
shares back to the banks at a premium.
In January, a special inspector general for the U.S. bank
bailout lamented that private investors could "come in quickly and
flip and profit." Three private investors scooped up nearly half of
the taxpayer-backed investments auctioned by the government.
Mr. Friedman defended his interest in the government's Troubled
Asset Relief Program, known by its acronym TARP. "Investing is a
two-way street," he said in an emailed response to written
questions. "There may be situations in which Treasury lost money,
but the taxpayers, the government and the country came out ahead on
these sales because so many banks became healthy."
EJF's main fund has earned an average annualized return of more
than 17% after fees since inception in 2008, according to investor
documents reviewed by The Wall Street Journal, compared with just
under 6% for peers, according to research firm HFR.
Assets under management have roughly doubled over the past two
years. Blackstone is the largest external investor, a person
familiar with the situation said.
EJF is an unlikely turn for Mr. Friedman, who at age 68 is a
decade or more past the usual retirement age for his peers. The son
of a rabbi in Wilmington, N.C., Mr. Friedman used his bar mitzvah
money for his first stock purchase in August 1961 and made a $60
profit. He taught history at a middle school to pay for night
law-school classes at Georgetown University and then took a job as
a stockbroker.
In 1989, he co-founded Friedman Billings, but his tenure ended
amid an insider-trading scandal in 2005. The investment bank and
Mr. Friedman, who was co-CEO and co-chairman at the time, settled
the Securities and Exchange Commission's civil charges and paid
millions of dollars in penalties. He neither admitted nor denied
wrongdoing.
Five months after resigning, Mr. Friedman launched his
hedge-fund firm and seeded the new company partly with his own
money. He now oversees about 70 employees on three continents.
"I love the intellectual challenge of the market, coming in
every day after 50 years and realizing that I know virtually
nothing," Mr. Friedman said.
His latest decision to lend to law firms invites new
complications. Several investors said they had passed on the
litigation fund because it appeared far afield from EJF's past
ventures.
Mr. Friedman said the new fund is part of a larger effort to
press forward in areas in which banks are retrenching from
lending.
EJF has also amassed positions in companies that manage
mortgages for investors and other lenders that could benefit from
regulatory changes to clamp down on banks. In Europe, EJF is among
hedge funds buying beaten-up bank and specialty finance assets such
as distressed lenders, a popular move that has seen muted returns
thus far amid the eurozone's political woes.
EJF's main fund is down about 1% in the first two months of this
year, according to investor documents reviewed by the Journal, as
Europe's recovery has faltered.
Mr. Friedman compared the European lending environment to the
Sahara and said the trade would ultimately prevail as the area
rebounds.
Write to Rob Copeland at rob.copeland@wsj.com
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