Daniel Zwirn was on top of the world. It was the summer of 2006, and Zwirn, just 35, was hedge fund royalty. In five short years he had built D.B. Zwirn & Co., a New York–based firm specializing in making loans to small and midsize companies, from nothing into a $5 billion empire with 260 employees spread among 16 offices from San Francisco to Singapore. The secret: good, consistent, noncorrelated low-double-digit annual returns — and even better connections.

Life was grand for the fast-rising manager. Through DBZ’s management company Zwirn had purchased a $17.5 million Gulfstream 400 jet the previous ...