Articles By Topic
By Topic: Liability of Hedge Fund Service Providers
From Vol. 10 No.6 (Feb. 9, 2017)
In recent years – following the Madoff scandal and the corresponding increase in regulatory scrutiny of hedge funds – investors have increasingly pressured managers to hire third-party fund administrators. See “” (Jan. 21, 2009). Administrators add an extra layer of review and verification to mitigate the insularity and lack of oversight that allowed Madoff’s fraud to flourish undetected for decades. Notwithstanding the critical role that administrators play in the financial services industry, they are not subject to the same level of regulatory oversight as other service providers, such as a fund’s prime broker or auditor. Accordingly, when an administrator’s processes break down, causing losses directly to the fund and indirectly to its investors, the fund’s only option may be to pursue a civil action against the administrator. The success of such a claim will then depend on not only the facts of the case, but also the provisions setting forth the administrator’s obligations and liabilities contained in the agreement between the fund and the administrator. In a guest article, Lisa Solbakken, a partner at Arkin Solbakken, provides insight on the proper role of the administrator, details ongoing litigation in which funds allege that their administrators breached their contractual duties to the funds and offers advice on how funds should approach the negotiation of their administration agreements. For more on administrator liability, see “” (Sep. 8, 2016).Read Full Article …
From Vol. 9 No.35 (Sep. 8, 2016)
“Gatekeeper” Actions by the SEC and Investors Against Administrators Challenge Private Fund Industry
Fund administrators have been the target of several recent SEC enforcement actions and civil lawsuits by investors that seek to make administrators liable for the misconduct of fund managers and their principals. These aggressive enforcement actions and civil lawsuits are the first of their kind to argue that administrators serve in a gatekeeper role. For more on the SEC’s focus on another category of gatekeepers, see “How Can Hedge Fund Managers Update Their Insider Trading Compliance Programs to Reflect the SEC’s Focus on Systemic Violators, Gatekeepers, Trading Patterns, Profitable Trades and Expert Networks?” (Aug. 19, 2011). In a guest article, Marc Powers and Jonathan Forman, partner and senior associate, respectively, at BakerHostetler, review recent SEC enforcement actions and civil lawsuits against administrators as gatekeepers and outline implications of these actions for hedge fund administrators, managers and investors. For additional insight from Powers, see “A New Look at an Old Standard: The Power of Minority Bondholders Under the Trust Indenture Act” (Mar. 5, 2015); and “Chapter 15 of the Bankruptcy Code Presents Litigation Risks and Liability for Creditors, Counterparties, Service Providers and Others Doing Business With Bankrupt Offshore Hedge Funds” (Oct. 3, 2013). For coverage of fund managers shadowing administrators, see “Certain Hedge Fund Managers Are Moving from Full to Partial Shadowing of Administrator Functions” (Sep. 12, 2013); and “When and How Should Hedge Fund Managers Shadow Functions Performed by Their Fund Administrators?” (Mar. 8, 2012).Read Full Article …
From Vol. 9 No.26 (Jun. 30, 2016)
Expanded “Gatekeeper” Responsibilities May Impact Relationship Between Hedge Funds and Service Providers
The Dodd-Frank Act expanded the SEC’s authority and oversight of the fund industry, in part by subjecting previously unregistered advisers to registration requirements. Two recent SEC enforcement actions have further increased this authority, finding that a service provider to hedge funds – not itself subject to fiduciary or other obligations under the Investment Advisers Act of 1940 (Advisers Act) – was responsible for Advisers Act violations by two of its clients. On June 16, 2016, the SEC announced the resolution of two enforcement actions against a private fund administrator that, by missing various red flags raised by activities of its private fund clients, allegedly caused those clients to violate antifraud provisions of the Advisers Act. This article analyzes the facts that led up the SEC’s allegations, resolution of the enforcement actions and potential industry implications. For more on the SEC’s focus on gatekeepers, see “How Can Hedge Fund Managers Update Their Insider Trading Compliance Programs to Reflect the SEC’s Focus on Systemic Violators, Gatekeepers, Trading Patterns, Profitable Trades and Expert Networks?” (Aug. 19, 2011).Read Full Article …
From Vol. 9 No.21 (May 26, 2016)
Hedge Fund Service Providers Must Exercise Caution When Communicating With Investors or Face Liability
A recent unanimous decision reinstated a hedge-fund investor’s negligent misrepresentation claim against a fund manager’s outside counsel. Although some coverage suggests that the decision represents a departure from New York law’s established “near-privity” requirement for negligent misrepresentation claims, the decision is consistent with prior case law. It also serves as a reminder of the care that hedge-fund service providers must exercise in dealing with a fund’s investors and potential investors. In a guest article, Anne E. Beaumont and Nora Bojar, partner and associate, respectively, at Friedman Kaplan Seiler & Adelman, discuss the case, negligent misrepresentation claims by hedge fund investors against service providers and lessons for hedge fund service providers. For additional insight from Beaumont, see “BDC Finance v. Barclays: Derivatives Collateral Calls in a Chaotic Market” (Mar. 19, 2015); “Eighteen Major Banks Agree to Adopt FSB/ISDA Resolution Stay Protocol That Postpones Exercise of Right to Terminate Derivatives on Bank Counterparty Failure” (Nov. 20, 2014); “The 1992 ISDA Master Agreement Says Notice Can Be Given Using an ‘Electronic Messaging System’; If You Think That Means ‘Email,’ Think Again” (May 23, 2014); and “Five Steps for Proactively Managing OTC Derivatives Documentation Risk” (Apr. 25, 2014).Read Full Article …
From Vol. 1 No.6 (Apr. 7, 2008)
Hedge Fund Service Professionals Do Not Owe Fiduciary Duty to Investors But May be Subject to Liability for Aider and Abettor Claims if Provided by State Statute
- State appeals court dismissed hedge fund investors’ $200 million lawsuit against fund’s outside counsel for lack of any fiduciary duty owed to investors.
- State appeals court ruled that preparation of offering memo not a representation, fraudulent or otherwise, to investors.
- Oregon investor who invested and lost $2.75 million in the fund and filed a separate federal fraud case survived outside counsel’s motion to dismiss because Oregon law grants private right of action against aiders and abettors.
- Federal case particularly significant because aider and abettor claims against lawyers or accountants in securities fraud cases generally barred under federal law, under recent Stoneridge Supreme Court case.