D.B. Zwirn & Co.

D.B. Zwirn & Co. was established as a spinoff from the investment management company Highbridge Capital Management in 2004, with Daniel Zwirn, who had been head of the Special Opportunities Group at Highbridge since 2001, as managing partner and chief investment officer. With the spinoff, the name of the operation was changed from Highbridge/Zwirn Capital Management to D.B. Zwirn & Co.

The firm was established to pursue special situations financing and asset-based lending with $500 million in seed capital from Highbridge in 2001, and it began accepting outside funds in 2002. Investment returns were strong and consistent. D.B. Zwirn & Co. became known in the financial community for its ability to analyze borrowers with illiquid assets, difficult to value assets, or other attributes that made them unable to acquire funding through traditional channels, and to structure loans that were both attractive to these borrowers and created strong returns for investors.

Daniel Zwirn, managing partner and chief investment officer of D.B. Zwirn & Co., had worked in investment and investment management roles previously at Highbridge, Davidson Kempner Capital Management, Madison Dearborn Partners, and, immediately before Highbridge, had founded the Special Opportunities Group of MSD Capital, the private investment firm of Michael Dell. Zwirn was educated at Harvard Business School, where he earned an MBA, at the University of Pennsylvania Wharton School of Business (BS in economics), and at the University of Pennsylvania Moore School of Electrical Engineering (bachelor of applied science in computer science).

At its peak size in 2007, D.B. Zwirn & Co. had approximately 275 employees.

In late 2005, certain irregularities in accounting at D.B. Zwirn & Co. were brought to the attention of the firm’s top executives. Upon learning of the issues, Daniel Zwirn ordered an internal investigation and then, in 2006, commissioned an external investigation conducted by the firm’s principal outside law firm. That investigation determined that the firm’s chief financial officer (CFO) had caused certain management fees to be taken earlier than allowed and had made improper transfers back and forth between funds, essentially lending money from one fund to another. This CFO was then fired by D.B. Zwirn & Co. Subsequently, additional irregularities were discovered, and the firm ordered an additional, expanded independent investigation. This investigation confirmed the additional issues but found no evidence that any senior executive at the firm besides the former CFO had been aware of them. Although outside counsel determined that the amount of money involved in the irregularities had been small enough to be legally immaterial, D.B Zwirn & Co. decided to reimburse investors with interest for any financial cost. The firm also decided to voluntarily report all of the issues, and the corrective actions it was taking to remedy them, to the SEC (though under no legal obligation to do so), which it did in October 2006, and to also report all issues to its investors.

The SEC then began its own investigation, which confirmed improprieties by the former CFO and cleared D.B. Zwirn & Co. and its CEO, Daniel Zwirn, of any wrongdoing.

Because the investigations into the accounting issues delayed D.B. Zwirn & Co.’s ability to complete its regular annual financial statements, it was unable to provide certain needed documents to investors in a timely manner, contributing to the firm’s ultimate decision to wind down the related funds and sell the company’s remaining assets. In negotiations with a variety of potential buyers, CEO Daniel Zwirn resisted selling D.B. Zwirn & Co.’s assets to any firm that intended to charge its investors higher fees. The firm sold its assets to an affiliate of Fortress Investment Group LLC and closed its doors in 2009. The SEC finished its investigation and cleared the firm and CEO Zwirn in 2011, more than four years after the firm had self-reported its accounting irregularities and its corrective action to the government.

In 2011, the SEC filed a civil complaint against the former CFO of D.B. Zwirn & Co. who had orchestrated the irregularities at the firm and who had been fired by D.B. Zwirn in 2006. In 2017, the U.S. District Court for the Southern District of New York granted summary judgment to the SEC on the most serious of its charges against the former CFO. In 2018, a final judgment was entered against the former CFO.

The fact that the SEC took more than four years to investigate voluntarily-reported accounting irregularities before clearing the firm and its founder of wrongdoing has become a well-known cautionary tale about the possibility of being too transparent in the investment industry. In 2012, Bloomberg Businessweek called the episode “a hedge fund horror story” not because of any wrongdoing by the firm, but because financially modest infractions by an employee without top management’s knowledge snowballed into a crippling series of investigations and roadblocks that led to the firm’s closing. In 2018, the industry publication HFM Compliance published an article on the advantages and disadvantages of self-reporting, “Should hedge funds self-report?” that featured D.B. Zwirn & Co. In November 2021, as a guest on a podcast, Daniel Zwirn said of his decision to report the irregularities he discovered at the firm, “Reputation isn’t under your control. Only character is…I had a whole string of decisions that I needed to make where I had to choose between cataclysmic potential negative consequences and character.” In 2018, Zwirn said of his decision to self-report, “In hindsight, I would do so again as it was the only ethical and correct path to take.”

In 2015, Daniel Zwirn founded the global special-situations investment firm Arena Investors, LP, where he is CEO and chief investment officer.