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Hedge Funds Target Law Firms For Alleged "Bad Advice"

While the SEC might have hedge fund "late trading" in its crosshairs (see 8/23/07 Overreg’d post), hedge fund managers have found their own targets – former counsel.

With mounting pressure from the SEC and other regulators for increased transparency in operations and reporting, several failed hedge funds and their managers have been sanctioned and forced to repay millions to investors. This has sparked what appears to be a growing trend - complaints against former hedge fund counsel for allegedly giving "bad advice."

In one of the most recent examples, former Veras hedge fund managers James McBride and Kevin Larson have commenced a lawsuit against Akin Gump Strauss Hauer & Feld LLP, Veras' former law firm for alleged bad advice regarding the propriety of the practice of  "late trading" - trading shares of mutual funds after the 4:00 p.m. market close.  Among other things, McBride and Larson allege they explained to Akin Gump attorneys that brokers were engaging in this practice, inquired whether this practice was permissible, and their attorneys told them that it was legal on several occasions. Larson and McBride seek damages in the amount of $4.4 billion.

Akin Gump has since denied the allegations and brought a motion to dismiss multiple counts of the complaint against its attorneys.

Only time will tell the significance of what appears to be a growing trend, but for the moment it would appear that law firms have become the new "deep pockets" for their failed hedge fund clients.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on August 28, 2007 (boomark / email).