Bermuda-incorporated mutual fund MDL Active Duration Fund and its Bermuda directors have asked a US federal court to dismiss a lawsuit filed by Ohio Attorney General Jim Petro to recover a $215 million investment by the Ohio Bureau of Workers? Compensation.

MDL Capital Management managed Bermuda pension funds for four years, but was fired for poor performance early this year.

The Ohio AG filed the lawsuit against the Bermuda parties as well as Pittsburgh-based affiliate MDL Capital Management, its chairman and chief executive Mark Lay and others in June alleging fraud, breach of contract and violations of the state?s securities laws.The AG accused MDL and Mr. Lay of lying about the degree to which the fund had exposed the state funds to risk, claiming it had leveraged about 900 percent of the fund?s assets, when the evidence showed the risk was closer to 1,900 percent. The Ohio complaint alleges that the contract allowed only 150 percent although MDL argues that the 150 percent leverage figure was only a guideline not a limit.

In its filing for dismissal, parent company MDL Capital accused the Bureau of using a ?fraud-by-hindsight lawsuit? to shift the blame from its own investment practices to a small minority owned company.

MDL?s filing also accuses the AG of making Mr. Lay and others scapegoats in a lawsuit that is a ?vehicle to provide political cover for elected and appointed officials.?

In a separate motion to dismiss, the Bermuda parties question why the Bureau waited almost two months to seek to withdraw of its investment after being formally advised by the Fund that the 150 percent leverage limits were being exceeded.

?What the Bureau fails to allege ? but cannot possibly deny ? is that it invested $25 million of that $125 million [invested in 2004 in the Fund on September 22, 2004 which was more than a month after being advised by the Fund that leverage was significantly higher than 150 percent.?

The parties said this clearly shows that the high rates of leverage were not a material concern since the Bureau continued to invest and that the litigation was ?a revisionist effort by the Bureau to escape the consequences of its own conscious choices.?

MDL Capital as well as the Bermuda parties ? MDL Active Duration Fund, directors Warwick Fiduciary Services Ltd. and Hamilton Fiduciary Services Ltd. as well as former directors Oskar P. Lenowski and C. Raymond Morrison ? requested the suit be dismissed this week on the grounds that top officials at the OBWC understood the risks of the hedge fund, which invalidates any fraud claims.

?Having elected to invest $225 million dollars in a Bermuda hedge fund, plaintiff, a highly sophisticated investor, now seeks to drag innocent Bermuda parties into litigation in Ohio and have them cover losses generated by Plaintiff?s fully informed, but ultimately unsuccessful, investment decisions,? the Bermuda parties said in the filing.

MDL is also asking the court to dismiss the suit against the Bermuda defendants on jurisdiction because they, especially the directors, transacted no business in Ohio and have no meaningful contacts with the forum. A section of the subscription agreement signed by the bureau on August 20, 2003 states among other things that the ?fund is governed by Bermuda law? and that therefore investors may ?Not have the same statutory protection or remedies available under the laws of other jurisdictions,? the Bermuda filing said. The bureau also signed a subscription agreement providing that its investment would be governed by Bermuda law and also submitted to the jurisdiction of the Bermuda course.

They also argue for a dismissal for failure to state a claim. ?The risks of which plaintiff now complains were disclosed to plaintiff when it invested, and the Bermuda defendants fully complied with their duties. Moreover, plaintiff?s tort claims against the Bermuda defendants ? who had absolutely no incentive to deceive plaintiff ? are preposterous on the face,? the document said. The parties also allege that the complaint does not claim a common law fraud against the fund. ?It is not the surprising that the Bureau cannot plead that the Fund acted with fraudulent intent. What possible motive would the Fund have to defraud the Buerau? The Bureau was the sole shareholder and only beneficial owner of the fund and the Fund?s directors were paid a flat fee of $2,000 per year regardless of how much the Bureau invested,? the filing states. In a Press release, AG Petro, who is running as a Republican candidate for governor, said that he would respond to the dismissal motions in court. ?This case is about whether the defendants lived up to their contractual obligations to a state agency and their duty to comply with our state?s securities laws. It?s our position and our client?s position that they did not. We were not surprised by the defendants? motions to dismiss our lawsuit based on arguments about court jurisdiction, the validity of the state?s legal case, and other points of law,? he said.