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Bankruptcy trio leaves Fidelity Experts who handled Merry-Go-Round to form own shop


The vultures are flying the roost at Fidelity Investments, but industry analysts believe they'll continue picking at Merry-Go-Round Enterprises Inc. and other distressed companies.

Bankruptcy specialists Dan Harmetz, David Breazzano and Judy Mencher are resigning from Fidelity following large losses on a few ill-chosen bets and a decision by Fidelity to invest more conservatively. Fidelity, based in Boston, is the world's biggest mutual-fund company.

All three people, especially Mr. Harmetz and Ms. Mencher, have been key players in Merry-Go-Round's bankruptcy case. Fidelity the Joppa-based national retailer's biggest creditor, and Mr. Harmetz and Ms. Mencher have worked closely with Merry-Go-Round management to try to fix the troubled chain.

It hasn't worked.

Merry-Go-Round continues to struggle and shrink. Merry-Go-Round stock and debt that cost Fidelity more than $70 million two years ago is today worth tens of millions of dollars less, analysts estimate.

The Merry-Go-Round debacle, plus two other disappointing bankruptcy investments last year, laid the groundwork 10 days ago for Fidelity's announcement that it would part company with the three managers and stop investing in troubled and insolvent companies.

In such "vulture" deals, investors typically buy debt in weak companies and try to profit by converting it into stock through the bankruptcy process. The risky technique can generate huge profits -- and huge losses.

"It was Merry-Go-Round, El Paso Electric and Harrah's Jazz," two other bankruptcy cases, "that were the embarrassments that caused them to jump ship," said Peter Chapman, president of Bankruptcy Creditors' Service Inc., in Princeton, N.J.

The move isn't expected to greatly affect Merry-Go-Round's case. Fidelity needs to manage the vulture investments it already has, and it is expected to contract with Mr. Harmetz, Mr. Breazzano and Ms. Mencher to do so.

"It's too hard to replace somebody in midstream" in a bankruptcy case, said another distressed-investment investor who asked for anonymity. The Fidelity managers did not return phone calls yesterday.

Fidelity said the three are setting up their own vulture investment firm, and analysts said they should have no problem raising new money to pursue vulture deals.

While the results of Mr. Harmetz and his Fidelity colleagues were less than stellar last year, industry sources said their departure was voluntary and part of a wider trend.

Other bankruptcy specialists have left large money-management concerns recently to set up their own shops.

One example: Howard Marks and Bruce Karsh resigned last year from Trust Co. of the West in Los Angeles to found Oaktree Capital Management.

By working for themselves, bankruptcy pros get the chance to boost their personal compensation and escape large bureaucracies that can cramp the nimbleness needed for vulture deals.

With the change at Fidelity, Baltimore's T. Rowe Price Associates Inc. is one of the few big, public mutual-fund companies that hasn't parted ways with its bankruptcy-investment talent. Price's Recovery Fund is a private partnership that makes vulture investments; its High Yield bond fund also buys bankruptcy paper sometimes.

Price's team of bankruptcy pros "are the only ones left who are still connected with anybody," said John McLaren of the Monument Group, a Boston investment banking firm that raised capital for Oaktree. "Maybe you should call the T. Rowe people and ask them why they're not doing it."

A Price spokeswoman declined to comment yesterday.

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