Adviser Went Against Own Advice--and Lost : Investment: Stock options trader James Douglas Donahue always hedged his bets. Then a gamble backfired and he lost more than $100 million for investors.

Financial adviser James Douglas Donahue had the golden touch--and the track record to prove it.

For about a decade, he made hundreds of clients happy by grabbing double-digit returns through aggressive trading of stock options, all the while promising to always hedge his bets.

That’s why many of his clients were shocked to learn last month that Donahue had lost more than $100 million belonging to 1,500 investors in a limited partnership run by his company, Hedged Investments Associates Inc. He had gambled big on UAL Inc. stock.

Equally as surprising was the way they received that news: through an 18-minute videotape, broadcast during a meeting called by Donahue at a Denver hotel. Donahue himself was nowhere to be found.

“Words aren’t adequate to express my regret and sorrow over the impact I’ve had on your lives,” Donahue said in a choked, breaking voice. “I have affected your lives and my life. Many of you have been my friends for 20 years and I feel terrible remorse for the things I’ve done to you.”

The investors ranged from the founders of Gates Rubber Co. and Samsonite Co., both based in Denver, to retirees who entrusted Donahue with their life savings.

“I suppose I should be just as angry as angry can be,” said Bert Johnson, a 58-year-old insurance broker from Evergreen, Colo. “But I’m not at the point where I’m bitter as much as I’m just frustrated. We don’t know what went on. My guess is that he broke his own rules.”

Johnson declined to say how much he lost.

As the investors try to uncover just out how Donahue lost their money, Hedged-Investments, based in Englewood, has filed for Chapter 7 liquidation proceedings in U.S. Bankruptcy Court, claiming about $2 million of the $100 million remains.

In addition, Hedged-Investments’ subsidiary, Aeroturbine Energy Corp. in California, has filed a petition for Chapter 11 reorganization.

Donahue and his firm already have been named in at least four lawsuits alleging he was negligent, breached his fiduciary responsibility and failed to allow access to records.

Attorneys and investors agree it could take more than a year just to sort out the complex case.

Donahue was known as an aggressive trader in stock options, which are contracts to buy or sell stocks for a specified price in the future. Aides say Donahue lived by two rules: Never take an excessive position in any one stock and always hedge, a technique to ensure that potential losses are minimized.

“The thing that attracted not only me, but obviously bigger hitters than I was, was the concept that this is a hedged-fund operation,” client Johnson said. “You cover all your options so that it doesn’t matter if the stock market goes up and down. You have yourself covered in both directions. That was the major selling point.”

In the past several months, Donahue gambled that the stock of UAL, United Airlines’ parent, would rise. But a failed employee buyout plan, coupled with the drop in stock prices after Iraq invaded Kuwait, caught him by surprise.

He wasn’t able to cover his position quickly enough, he has told investors.

“He basically acknowledged he broke the promise that he’d always hedge,” said Chesley Culp III, a Denver attorney representing several small investors. “It’s intentional misrepresentation.”

Attorney Harry Hobson, whose client, Union Texas Petroleum Corp.’s pension fund, lost an estimated $8 million, said there was no inkling that the firm was in trouble. The fund invested because “it appeared at the time, I think, that he had a good earnings record,” he said.

Robert Dill, Donahue’s attorney, said investors were aware of the risk involved. Nonetheless, he said Donahue was “very depressed and upset and concerned about the effect this had on many friends and associates.”

Donahue received a bachelor’s degree in business from the University of Denver in 1959 and earned a master’s degree in mathematics from Stanford University the following year.

In July 1960, he joined the research department of Martin Marietta Corp. in Denver as a statistician and computer systems analyst. He became part owner in Falcon Research Development Co. in May 1966, then joined the staff of Science Applications Inc., a specialist in statistical and computer research, in 1974.

Intrigued by the stock options trading industry, Donahue developed and refined his own theory, which he detailed in a newsletter called Options Strategies that was published from 1974 to 1976.

In 1977, Donahue opened Hedged-Investments, using his computer software program to assess stock risks.

He kept the number of limited partners in each venture to fewer than 100 to avoid registering with the Securities and Exchange Commission. But some of the partners, like company retirement funds, were composed of 100 or more investors.

Donahue’s concept attracted investors of all financial backgrounds, from retirees to Denver business leaders and pension retirement funds, including Weyerhaeuser Co. of Tacoma, Wash., which lost $35 million in Hedged-Investments.

As the years passed, Donahue reportedly earned 15% to 20% annually for his clients.

“He really was very impressive from the standing of seeming to know what he was doing,” said Johnson, who described Donahue as friendly and intelligent. “It’s no secret that he was showing, for approximately 10 years, fantastic returns on money that people were investing with him.”

Some investors said they were skeptical about the UAL-blamed losses, noting that Donahue never provided them with the results of a company audit. And as of June 30, Hedged-Investments had informed clients that their investments still showed an increase, several have said.

Attorney Harvey Sender, who has been appointed trustee of the Chapter 7 liquidation process, said the case is complex because of the amount of money and documentation involved.

Since the announcement was made late last month, Union Texas, Weyerhaeuser, Paradigm Partners Inc. of Northbrook, Ill., H&W; Hedge Fund of California and Denver-based Debt Investment Inc. have sued Donahue, Hedged-Investments or Aeroturbine to recoup losses.

Among the investors listed in documents filed in bankruptcy court are: Charles Gates, owner of Gates Rubber; several members of the Shwayder family, former owners of Samsonite; Dianne Ingels, a former director of the failed Silverado Banking, Savings and Loan, and Laurence DeMuth Jr., secretary and general counsel of U S West Inc.

Johnson said he knows several retirees who lost so much they will be forced to return to work. But he notes, Donahue, too, is suffering.

“He’s a broken man himself. When all this stuff shakes out, he’ll lose everything he had,” Johnson said. “He might keep his house, but his reputation is gone.”