Investment Management Litigation Year in Review

November 7, 2008

Seward & Kissel’s Litigation Group is often called upon by the Firm’s investment management clients to counsel them on various matters and to represent them before various courts, arbitration venues, and administrative agencies. During the past year, the Group has been actively involved in securities litigation, SEC and FINRA enforcement proceedings and investigations, as well as other diverse cutting edge issues relating to the financial market crises. Highlights from the past year include:

  • Representation of a large financial institution in a jury trial in the Southern District of New York in which the jury awarded the financial institution and a co-plaintiff an amount in excess of $40 million before interest (over $64 million with pre-judgment interest) for breach of an oral contract in connection with the sale of high yield notes that had been issued by a public company;
  • Successful defense of the management company of a large hedge fund in a lengthy litigation and jury trial against claims brought by a member of the management company seeking an ongoing interest in the company;
  • An award of $30.6 million in an arbitration of a breach of contract claim of a hedge fund against its former brokers who had assigned the fund’s cash foreign exchange trading account to Refco six weeks prior to Refco’s bankruptcy;
  • A defendants’ jury verdict on behalf of a mutual funds manager and individuals in an action in which the plaintiffs alleged breach of non-competition and non-solicitation provisions in a contract with a prior manager of the mutual funds;
  • A defendants’ jury verdict in an action in the United States District Court for the Southern District of New York in which plaintiffs alleged fraud claims under Rule 10b-5 and common law in connection with the sale of their interest of a bio-tech company to defendants;
  • A substantial award in an arbitration on behalf of an owner of a distressed debt firm who was ousted from the firm;
  • Representation of a hedge fund and its principal in an action brought by an investor who sued when the fund lost approximately 90% of its value due to its short selling strategy. Ultimately, the action was dismissed on summary judgment by the Eastern District of Michigan and affirmed on appeal by the 6th Circuit;
  • Representation of a fund of funds in connection with its investment in a failed hedge fund and the successful recovery of amounts due as a result of the fraudulent conduct of the principals of the hedge fund;
  • Representation of a hedge fund in an SEC investigation that later was accused of violating Section 5 of the 1933 Act for allegedly selling unregistered securities when it covered short positions with PIPE shares;
  • Representation of an investor in the Bayou Superfund in connection with an action brought by the court-appointed receiver to recover the redemptions as fraudulent transfers under Section 548 of the Bankruptcy Code and under the New York debtor and creditor law;
  • Representation of an offshore fund of funds which is being sued in federal court in Florida by the court-appointed receiver of another offshore fund to return excess redemptions under Florida and New York law; and
  • Representation of a hedge fund which purchased restricted stock in a private placement in a REIT fund, in an action against the sponsor and manager of the REIT fund, for breach of contract in failing to use commercially reasonable efforts to cause a registration statement to become effective.

In addition, the Firm and our Litigation Group continue to act in a variety of matters that we often see relating to investment management firms and the financial markets, in general, which include:

  • Representation of hedge funds that have been sued or threatened to be sued by investors for market losses or liquidity issues;
  • Representation of hedge funds in SEC and FINRA enforcement proceedings, as well as in regulatory investigations involving, among other things, insider trading, soft dollar arrangements, market manipulation, lack of supervision, violations of electronic trading rules, and allocation issues;
  • Representation of investors that invested in funds which have collapsed due to fraud;
  • Conducting of internal investigations involving allocations and front running issues;
  • Representation of hedge funds with respect to derivative stockholder claims seeking to recover alleged short swing profits under Section 16(b) of the Securities Exchange Act; and
  • Providing advice and representation of hedge funds and investment banks in employment-related disputes before courts, administrative agencies, FINRA and arbitration panels from various organizations involving compensation claims, discrimination claims, corporate raiding, whistleblower claims, Sarbanes-Oxley retaliation claims and the enforcement of post-employment no-poach and/or non-compete restrictions, including garden leave policies.

If you have any questions or comments about this Year in Review, please contact one of the attorneys listed below.