Fortunately, there hasn’t been a great deal of litigation yet in the hedge fund world, because with a strong market investors have been making money. People generally don’t start lawsuits when they are fat and happy. (Figuratively fat and happy, of course. Everyone who starts a lawsuit isn’t necessarily skinny.)
Another reason there hasn’t been much litigation is that hedge funds are dealing mainly with sophisticated investors, who know there are risks to investing and are willing to take on those risks. These investors can stomach reasonable losses and (again, fortunately) there haven’t been many catastrophic failures of hedge funds. While an estimated 10,000 to 20,000 funds have closed their doors over the years, most of them have done so quietly.
But the world is changing in some significant ways:
– we’ve seen a significant market correction
– we’ve seen the collapse of the subprime lending market
– we’ve seen increased scrutiny of funds by regulators
We started this blog as a forum for discussion about some of the issues that the hedge fund world faces, and may be facing more and more frequently in this new environment. Specifically, we started this blog to talk about what happens when hedge funds find their way into courtrooms.
It is safe to say that investors don’t like to lose money (you should be paying for this kind of wisdom!). And when people lose a LOT of money they often try to get it back – from wherever they can.
For example, the hedge fund Sphynx Ltd. and its manager, Plus Funds Group, filed for bankruptcy after the Refco collapse last year – Sphynx had been holding hundreds of millions of dollars in futures accounts with a Refco affiliate. The Sphynx bankruptcy case was filed down in the Cayman Islands, and a couple of months ago the liquidator down there presented a list to the court – seven pages long – of potential defendants that might be sued to attempt to recover some of the losses. The list contained hundreds of names. The liquidator was quoted in the press as saying “When they’re losing billions of dollars, people have to look at who is accountable.”
That’s what we’re here to talk about – big losses tend to generate big lawsuits: Amaranth, Bayou, the Refco debacle, and the recent Bear Stearns cases are just some of the early examples. The recent decision of the US Bankruptcy Court in the Southern District of New York not to recognize the bankruptcy filings of two Bear Stearns funds in the Cayman Islands – when you look behind the procedural issues – should be seen as a warning from the courts that judges are going to be very careful when it comes to protecting the rights of the people who lose money in hedge funds.
We will be following it all, and keeping you informed.