million mutual fund to cover losses by its manager in another account could become a powder keg for Japan's second-largest securities firm.

Daiwa America Corp. took the assets of Bermuda-based RCM Global Long Term Capital Appreciation Fund Ltd. -- consisting of money from 19 shareholders -- on July 24 to cover a $35 million loss in an account controlled by the fund's manager, New York-based Rowayton Capital Management.

Brokerage officials and securities lawyers called the move unprecedented because Daiwa used money that belonged to investors in one account to cover losses by its manager in another.

"I can't recall where I have ever seen this kind of thing before,'' said Richard Harriton, head of correspondent clearing at Bear, Stearns & Co., one of the US's biggest brokers for investment funds.

"If the clearing firm had a guarantee from the individual accounts, then I could see it happening.'' Lawyers said Daiwa took a risk in seizing the account, which invested in currencies. The action may not stand in New York State Supreme Court in Manhattan, where Daiwa has filed suit seeking a judgment that the seizure of RCM Global was proper, outside attorneys who are following the case said.

Proper or not, Daiwa's action startled money managers and shook the confidence of investors in the $100 billion offshore investment-fund industry.

Funds are often set up in Bermuda or the Cayman Islands to take advantage of more lenient tax laws.

British Virgin Islands-based Magnum Fund Management Ltd, which had $550,000 invested in RCM Global, said it is organising a boycott of any fund manager that does business with Daiwa.

So far, about half a dozen so-called funds of funds -- which allocate investors' money to managers -- have joined the boycott, said Magnum Chairman Dion Friedland. Those funds control about $500 million of investment capital, he said.

"This thing is going to bite Daiwa badly,'' Friedland said.

Daiwa, a unit of Daiwa Securities Co. of Japan, alleges that Rowayton's owner, former Salomon Brothers currency trader Bill Lipschutz, assured it that RCM Global and Rowayton should be treated as one account. Lipschutz, who had about 15 separate accounts at Daiwa, denies giving such assurances.

"If there is not a basic overlap of ownership in the two funds, (Daiwa's action) raises very serious legal questions,'' said Harvey Goldschmid, a professor of securities law at Columbia University in New York. He said he knew of no cases that would seem to back up Daiwa's position.

RCM Global and Rowayton have asked a judge in New York State Supreme Court in Manhattan to return RCM Global's assets to the Daiwa account and freeze them until there is a ruling on whether Daiwa's seizure of the funds is legal.

Rowayton says it expects a decision this week.

A spokesman for the Securities and Exchange Commission in Washington said it isn't involved in the Daiwa case because RCM Global is based in Bermuda.

Robert Kleinberg, general counsel of Oppenheimer & Co., a New York-based securities firm, said he was "startled'' Daiwa was able to take money from one Lipschutz fund to pay off the currency trader's other losses. That's not something a securities firm would typically do, Kleinberg said.

Jack G. Levin, director of regulatory and legal affairs at Montgomery Securities in San Francisco, said it is common for banks and securities firms to work out so-called "cross-collateral'' agreements, where an investor's assets in one account may be used to cover another. "But we can't go after another investor's money in the account,'' said Levin.

Daiwa's success in convincing a judge that its action was legal could hinge on an agreement the firm signed with Rowayton in May that said one party and its affiliates could be held responsible if it defaulted on any foreign exchange transactions. That's what Rowayton did when it couldn't cover its losses.

Daiwa says Lipschutz assured it that the suffering Rowayton account and RCM Global were more than affiliates.

"Mr. Lipschutz told us that RCM and RCM Global weren't just affiliates, but that they were the same,'' a spokesman for Daiwa America said. "We agreed to net balances between affiliates, and the facts will show that these entities are affiliates. Among other things, Mr. Lipschutz admits that he controlled both entities with 100 percent voting control of one and 30 percent control of another.'' Rowayton and RCM Global say the two accounts weren't affiliates because Rowayton didn't have control of RCM Global.

Lipschutz, Rowayton Capital's owner, is the investment manager for RCM Global and owns a 3.5 percent stake in it. His wife, Lynnelle Jones, is one of three directors of RCM Global.

Lipschutz has greater voting control of the fund than his ownership suggests because his Bermuda-based management company -- Rowayton Capital Management Ltd. -- owns 12,000 founders shares, which it purchased for $1 a share when the fund started. The value of those shares doesn't change.

"Normally affiliates are two corporations whose stock is owned by the same parent corporation so there's a common owner,'' said Eric Rieder, a partner with Robinson, Silverman, Pearce, Aronsohn & Berman. In general, it would be hard to call funds like RCM Global and Rowayton affiliates because many of RCM Global's assets are owned by other investors, he said.

Rieder said he wasn't involved in the case and is assessing it based on media reports.

Experts said US mutual funds were immune from such seizures because the Investment Company Act of 1940 says among other things that an investment adviser or sponsor can't take money from a mutual fund for its own use unless the money is being used as payment for a legitimate service rendered.