CG Carlyle Group Inc

A former portfolio manager at a hedge fund firm owned by Carlyle Group LP has sued the company, saying the fund's partners misled investors about the size of a losing bet tied to shipping rates.

The Carlyle-owned firm, Vermillion Asset Management LLC, wound down last year after assets in its main fund dwindled from $2 billion to less than $50 million due to steep trading losses and investor withdrawals, and its co-founders left. Troubles at the firm were the subject of a front-page article in The Wall Street Journal in August. The firm has since been relaunched with a new strategy as Carlyle Commodity Management.

Vermillion's main fund, the Veridian Fund, took a bullish position in 2012 on derivatives tied to the price of shipping dry goods, such as grains and iron ore, in cargo ships on the high seas. The market was showing signs of life after collapsing in the aftermath of the financial crisis, and the trade made money for the fund for two years.

But those shipping rates began to plummet in late 2014, losing two-thirds of their value between November and the following February. Vermillion's top managers stuck with the bullish bet through that time, according to the lawsuit and people familiar with the trade.

In a lawsuit filed Tuesday in federal court in Connecticut, oil trader Nikhil Dhir said as much as 90% of the fund's capital was allocated to the trade at times during the period, despite representations to investors that no more than 30% of assets would be allocated to any single market. Mr. Dhir also claimed the investment was illiquid and highly volatile, also contradicting terms in the fund's marketing materials, according to the suit.

Mr. Dhir said in the suit that he and other managers raised concerns about the position to the firm's top executives, Christopher Nygaard and Andrew Gilbert, including at a meeting at Carlyle's offices in October 2014 with Mr. Gilbert. During the meeting, the managers said the trade was becoming an "Enron situation"—in a reference to the Houston energy company that collapsed in an accounting scandal in 2001—and that the fund managers were being "crazy and irresponsible" by not implementing better risk controls, the suit said.

The lawsuit also claims the fund's partners said it would be better to "ride the position to zero" rather than admitting the poor trade to clients because investors would withdraw from the fund.

Messrs. Nygard and Gilbert are named as defendants in the suit.

A spokesman for Carlyle declined to comment on the specific allegations in the lawsuit. In a statement, he said: "Transparency, integrity and our fiduciary duty are the core of our commitment to our investors and we will vigorously defend ourselves. These baseless and frivolous claims were filed by a disgruntled former employee."

The suit said Mr. Nygaard and Mr. Gilbert were fired for "malfeasance" in June 2015. Neither Mr. Nygaard nor Mr. Gilbert returned voice-mail messages left on their mobile phones seeking comment. News of the lawsuit was reported earlier by Bloomberg News.

In the lawsuit Mr. Dhir said he was fired in January 2015, one day before the firm was supposed to pay him a bonus for 2014 that could have amounted to $1.3 million, based on trades in oil markets that generated profits of $11.5 million. The suit notes Mr. Dhir filed a claim with the U.S. Department of Labor over the matter last summer, and the agency made no findings.

The suit is only the latest trouble for Carlyle's shrinking hedge fund business. Though hedge funds were once part of an effort for the private-equity shop to diversify beyond buyouts, Carlyle-owned firms like Claren Road Asset Management have dragged of late.

On Wednesday, Carlyle reported a fourth-quarter loss and said it would set aside a $50 million reserve for "ongoing litigation and contingencies." It didn't detail the reason for the reserve.

Write to Christian Berthelsen at christian.berthelsen@wsj.com and Rob Copeland at rob.copeland@wsj.com

(END) Dow Jones Newswires

February 11, 2016 17:15 ET (22:15 GMT)

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