One Man's Tort Is Another's Poison

If you're a lawyer for a hedge fund, you may want to beef up your defense practice. Your own defense, that is.

The New York Law Journal reported yesterday that two former hedge fund managers are suing their law firm, Akin Gump Strauss Hauer & Feld, for advising them on making illegal market trades of mutual fund shares.

Each of the two former managers of the Veras funds, James McBride and Kevin Larson, paid $750,000 to settle regulators' fraud charges. The Sugar Land, Texas, funds, which had $1 billion in assets before the charges were made in 2003, paid $36 million in penalties before closing down.

Since McBride and Larson are banned from the securities industry now, they are evidently hoping to make up for lost income from Akin Gump. They are suing it for a whopping $4.4 billion in damages. Akin Gump denies any wrongdoing.

This isn't the first law firm to be ensnared in the fallout from a fallen fund, the article notes. The private equity firm Thomas H. Lee sued Mayer, Brown, Rowe & Maw for misrepresenting the financial picture of Refco before it invested in it. Another firm, Seward & Kissel, is being sued by an institutional investor in one of the hedge funds it represented before it collapsed.

What's that you say? Peeved investors suing third parties for their role in the fraud that caused their investments to be wiped away?

Sounds like something President Bush would not approve of.

Yesterday, the Department of Justice weighed in on a closely watched case on the Supreme Court's docket involving whether or not public shareholders can sue third parties (like law firms and accountants) for their role in their clients' fraudulent activities.

The Securities and Exchange Commission previously sided with investors. But the Department of Justice, in a friend of the court brief filed yesterday, said it did not believe that investors can hold third parties accountable.

Allowing such shareholder lawsuits would result in "potentially exposing customers, vendors, and other actors far removed from the market to billions of dollars in liability," the administration argued.

Of course, the outcome of the Supreme Court case will have little impact on future lawsuits against lawyers for most hedge fund and private equity firms, since they involve private investors.

But when the business interests of institutional investors mirror the financial interests of individual investors, what becomes the new definition of "frivolous lawsuit"? We'll wait for the lobbyists to tell us.

by Megan Barnett