Two hedge fund founders were accused in a U.S. lawsuit of using accounting manipulation to loot $205 million in fees from Tetragon Financial Group Ltd.

The complaint names Patrick Dear and Reade Griffith, who founded the hedge fund firm Polygon Investment Partners LLP, as well as nine other individuals who are current or former Tetragon directors or are affiliated with Polygon.

Dear and Griffith are also Tetragon directors, and the incestuous relationship between Tetragon and Polygon allowed them to collect fees they did not deserve, according to the complaint filed late Monday in Manhattan federal court by Daniel Silverstein, a Pennsylvania shareholder in Tetragon.

Most of the defendants once worked at major financial institutions or hedge funds, according to the complaint.

A spokeswoman for Tetragon and Polygon had no immediate comment.

Based in Guernsey and listed in Amsterdam, Tetragon is a closed-end fund that invests mainly in equity slices of collateralized loan obligations, according to the complaint. These use leveraged loans as collateral backing debt securities that are issued.

The complaint said a Polygon affiliate -- named Tetragon Financial Management LP -- was to receive a 1.5 percent management fee, plus a 25 percent performance fee on quarterly gains above a minimum based on the London Interbank Offered Rate, or Libor.

But it said the Polygon affiliate reaped unjust fees by marking up the value of the fund, in a manner that let it ignore hundreds of millions of dollars of previous losses.

To help accomplish this, it said the defendants stacked Tetragon's board with directors affiliated with Polygon.

Defendants have looted, and continue to loot, TFG through a series of manipulative actions entered in bad faith and in derogation of the fiduciary duties owed to them by TFG, the complaint said. The individual defendants and entities controlled by them were, and remain, conflicted by their web of incestuous cross-affiliations.

Silverstein's lawsuit seeks to recover money for Tetragon and its shareholders and to void Polygon's management contract.

Tetragon paid $168.1 million in management and performance fees in the year ended March 31, according to its website. Net income totaled $487.7 million, and net investment income totaled $18.5 million, the website said.

The law firm Robbins Geller Rudman & Dowd, a specialist in shareholder litigation, represents Silverstein.

The case is Silverstein v. Knief et al, U.S. District Court, Southern District of New York, No. 11-04776.

(Reporting by Jonathan Stempel; Editing by Tim Dobbyn)

Lawsuit