© 2012 Bloomberg Finance L.P. Originally published by Bloomberg Finance L.P. Reprinted with permission. The opinions expressed are those of the author.
Well-publicized fraud scandals, including Bernie Madoff 's $20-billion Ponzi scheme and the Bayou Capital case, to mention only a few, have led to increased regulation of hedge funds. But hedge funds are more likely to have been the victims than the perpetrators of fraudulent schemes. Indeed, some of the largest creditors in the Madoff bankruptcy are hedge funds.
When a hedge fund is the victim of a fraud or misrepresentation, the fund manager is responsible for commencing any appropriate litigation to recover the fund's losses. It has become commonplace in recent years for the manager to sue in a representative capacity, naming itself as the plaintiff. But unless the fund has assigned its claims, the manager will not have standing. In a recent decision, MVP Asset Management (USA) LLC v. Vestbirk, the Eastern District of California dismissed a securities fraud action by hedge fund manager MVP Asset Management (USA) LLC (MVPAM) for lack of standing. The court adopted the reasoning of a 2008 Second Circuit decision holding that, absent a valid assignment of the claim, an investment adviser could not sue for a client's losses, as the client, and not the adviser, had suffered the actual injury. See W.R. Huff Asset Management Co., LLC v. Deloitte & Touche LLP, 549 F.3d 100 (2d Cir. 2008). MVPAM amended the complaint, alleging that the fund had assigned its claims to the plaintiff manager, but the amended complaint was dismissed on the grounds that the allegations were not suffcient to establish the assignment.The court subsequently found that a Second Amendment Complaint was also insuffcient to establish the validity of the alleged assignment, forcing MVPAM to amend its complaint yet again.
Counsel to hedge funds and their managers should take heed to ensure that the proper party is the named plaintiff in any litigation on behalf of funds. They also should consider revising the contracts with their funds to provide for the assignment of a fund's claims for collection to the fund's manager, so that it can sue in its own name. Unless the fund's claims have been validly assigned to the manager, the hedge fund itself, rather than its general partner or manager, should be the named plaintiff in any securities fraud or similar action to recover losses suffered by the fund.
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