The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: Investor Complaints

  • From Vol. 8 No.44 (Nov. 12, 2015)

    Class Action Lawsuit May Affect Retirement Plan Allocations to Hedge Funds

    Following the 2008 financial crisis, pension managers looked to hedge funds as one way of making up performance losses.  That approach may have backfired for one large corporation whose alternative pension investments stand accused of poor performance.  A former employee is the named plaintiff and class representative in a putative class action against the corporate committees and their members that were responsible for the corporation’s pension investments.  The suit charges that, by investing heavily in “risky and high-cost hedge funds and private equity investments,” and by eschewing more widely accepted pension allocation models, the defendants breached their fiduciary duties to the pension plans, which sustained “massive losses and enormous excess fees.”  This article summarizes the key allegations against the ERISA fiduciaries who elected to invest in hedge funds and other alternative investments.  For more on ERISA fiduciary duties, see the first two parts of our series entitled “Happily Ever After? – Investment Funds that Live with ERISA, For Better and For Worse”: Part One, Vol. 7, No. 33 (Sep. 4, 2014); and Part Two, Vol. 7, No. 34 (Sep. 11, 2014).

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  • From Vol. 8 No.40 (Oct. 15, 2015)

    Investor Lawsuit Against Lynn Tilton Alleges Misrepresentations and Excessive Fees

    A German bank and its affiliate that invested in two collateralized debt obligations (CDOs) sponsored and managed by Lynn Tilton’s firm, Patriarch Partners, have sued Tilton and the collateral managers of those CDOs in New York State Supreme Court for fraud and negligent misrepresentation.  The investors allege that the defendants improperly invested the CDOs’ assets in controlling equity positions in portfolio companies, enabling them to extract “excessive management fees” from those companies and benefit themselves at the expense of their investors.  The plaintiffs, who are seeking damages of more than $45 million, claim that the CDOs were in fact “poorly run and incredibly risky private equity ventures,” rather than traditional CDOs that invested in portfolios of debt.  This article summarizes the factual background of the dispute, the defendants’ alleged misconduct and the investors’ specific claims.  The suit follows the March 2015 SEC enforcement action against Tilton and the collateral managers of three CDOs sponsored by Patriarch Partners.  See “SEC Fraud Charges Against Lynn Tilton, So-Called ‘Diva of Distressed,’ Confirm the Agency’s Focus on Valuation and Conflicts of Interest,” The Hedge Fund Law Report, Vol. 8, No. 14 (Apr. 9, 2015).

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  • From Vol. 5 No.36 (Sep. 20, 2012)

    How Should Hedge Fund Managers Handle and Document Investor Complaints?

    Not all hedge fund investors are satisfied customers, but not all dissatisfied hedge fund customers sue or seek to arbitrate.  A halfway house between legal action and no action is the investor complaint – an expression of dissatisfaction with some aspect of the investment relationship, which need not relate to performance.  Good performing hedge fund managers can (and do) receive investor complaints, and the most formidable types of complaints frequently relate to matters other than performance, for example, the legality or propriety of conduct of manager personnel.  Adaptive hedge fund managers have developed an infrastructure and style for responding to complaints, and view them as an opportunity to engage investors and other constituencies.  Lesser managers bristle at any whiff of criticism, though that is a bad strategy for all involved; from the investor perspective, part of the job of a hedge fund manager is engaging with reasonable investor inquiries, including justified complaints.  Moreover, given the relatively small size of the hedge fund investor universe (at least compared to the retail investing population), the SEC’s whistleblower bounty program and competition for scarce assets, appropriately calibrated responses to investor complaints can have implications for marketing, reputation and regulatory relations.  In short, navigating the investor complaint process is a relatively novel challenge in the hedge fund industry, but an increasingly important one.  To help hedge fund managers think through the various components of this challenge, this article discusses: what constitutes an investor complaint; who within the management company should receive such complaints; how investor complaints should be investigated and addressed; when to notify the general counsel of an investor complaint; how to determine the appropriate course of action, including whether, when and how to respond to complaints; and how to document a complaint.

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