a failed mutual fund. The fund's collapse -- leaving investors seething -- has been probed by a US newsletter. Deidre Stark reports By Deidre Stark Bermuda-based investment firm Lines Overseas Management yesterday attempted to distance itself from the collapse of a mutual fund run by its former Cayman manager.

But the firm did admit former manager Terry McKolskey -- who set up the Star Capital Fund, ran it and appointed himself liquidator -- had disappeared leaving burnt investors with questions about where their money has gone.

In the most recent edition of Miami-based financial watchdog newsletter, Offshore Alert, former Royal Gazette journalist David Marchant wrote that staff of LOM (Cayman) ran and promoted the failed fund.

LOM's Bermuda-based parent company yesterday dismissed that claim as misleading, but it last night admitted calling an investigation into the actions of former Cayman-based manager Mr. McKolskey who has since resigned.

Offshore Alert quoted investors who lost money in the fund and wanted an inquiry into the legality of its operation, liquidation and links with LOM.

"The chaos and confusion surrounding the fund has angered investors at least two of whom are contemplating bringing legal action to recover their money, although it is unclear as to who they would sue,'' the report said.

"One investor we spoke with said that nowhere in the fund's prospectus did it disclose that funds would be loaned to directors.'' But the article said American businessman David Dugas was loaned $550,000 which he had since refused to repay since he was in dispute with LOM over the way it handled his investments.

It also alleges statements for the fund were sent out on LOM-headed notepaper.

And it says the fund was heavily promoted in columns by Mr. McKolskey and another LOM employee in several editions of an investment newsletter edited by two beneficial shareholders in Bermuda-registered LOM (Holdings) Limited.

In those articles LOM's main Cayman telephone number was given as a contact number for the fund and no relationship was disclosed, Offshore Alert says.

Mr. Marchant quotes an anonymous investor in the fund who said if the same had happened in the US, the matter would have quickly landed in court.

The investor said monthly LOM statements "with no basis in fact for reporting a NAV for this fund'' were sent out and investors were left "totally without support''. "Can you imagine a fund in North America first changing its investment mandate, then deciding to liquidate without attempting to inform its investors? It strikes me that LOM is in a tenuous position in this affair.'' LOM issued a statement accusing Marchant of running a negative, "National Enquirer-style'' campaign again st the six-year-old investment firm which has offices in Bermuda, Guernsey and Grand Cayman.

But a LOM spokeswoman confirmed the Cayman-registered Star Capital Fund was set up by Mr. McKolskey in 1996 while he was the manager of LOM (Cayman).

"The fund was conceived by Mr. McKolskey and set up with the undertaking to senior LOM management that it would operate completely outside of LOM,'' she said.

"After the fund had been launched Mr. McKolskey requested on behalf of the fund shareholders that they be allowed to open accounts at LOM and deposit their Star fund holdings into their accounts.'' The fund itself was meant to have a "separate office, manager, marketing staff, valuer and register and transfer agent'' while Mr. McKolskey was not meant to use his office or position within LOM to promote or manage the fund.

However, she admitted things did not go according to plan and the manager's employment at LOM ended.

"In the spring of 1997 LOM's management became aware from clients of LOM that Mr. McKolskey was using his office to promote this fund and LOM management took immediate action to rectify the situation.

"As a result Mr. McKolskey took a leave of absence from LOM at the end of April 1997 and resigned in mid July 1997.

"At this time LOM's management was not aware of any other improper actions on the part of Mr. McKolskey with regard to the fund.'' But she said a few months later an investor in the fund asked through LOM to redeem their holding. Upon that request Mr. McKolskey as the sole voting shareholder of the fund suspended redemptions and appointed himself liquidator.

Shareholders were told that despite the fund's published NAV of $6.1180 at the time liquidation began, only $3.4247 was to be dispersed. The initial price had been $10. The remaining 44 percent was tied up in investments which Mr.

McKolskey was still trying to liquidate, shareholders were informed. The LOM spokeswoman said the company paid lawyers to question Mr. McKolskey over the failed fund, its operations and the liquidation and then passed the matter to the Cayman Monetary Authority.

Last night LOM managing director Scott Lines said the company and its lawyers had repeatedly tried to contact Canadian Mr. McKolskey without success, and had "no idea'' where he had disappeared.