Articles By Topic
By Topic: Arbitration
-
From Vol. 5 No.5 (Feb. 2, 2012)
Second Circuit Rules Hedge Fund VCG Is Not Entitled to Arbitration in CDS Litigation Because It Was Not a Customer of Wachovia Bank
On October 28, 2011, the U.S. Court of Appeals for the Second Circuit ruled the investment banking unit of Wachovia NA (Wachovia), Wachovia Capital Markets LLC (WCM), did not have to submit to binding arbitration with VCG Special Opportunities Master Fund Ltd. (VCG). It reasoned that VCG, the hedge fund suing Wachovia over a $9 million credit default swap (CDS), did not constitute a “customer” of the unit. For additional background, see “S.D.N.Y. Dismisses Jersey Hedge Fund VCG’s Claim against Wachovia Alleging Improper Demands for Collateral under a Credit Default Swap and Orders VCG to Pay Wachovia Balance of Demanded Collateral and Attorney’s Fees,” The Hedge Fund Law Report, Vol. 3, No. 34 (Aug. 27, 2010), “Hedge Fund VCG Special Opportunities Fund Loses CDS Dispute with Citigroup Unit,” The Hedge Fund Law Report, Vol. 3, No. 12 (Mar. 25, 2010); “Growing Wave of Credit Default Swap Litigation: Judge Rules Citigroup Did Not Cheat VCG Hedge Fund on Swap and Trims Claims in VCG/Wachovia Litigation,” The Hedge Fund Law Report, Vol. 2, No. 31 (Aug. 5, 2009).
Read Full Article … -
From Vol. 4 No.41 (Nov. 17, 2011)
U.S. District Court Evaluates FINRA Arbitration Decision in High-Stakes Severance Dispute Between UBS and Former Portfolio Manager
Plaintiff Stephen P. Finkelstein (Finkelstein) was a portfolio manager for Dillon Read Capital Management (Fund), a hedge fund operated and owned by defendants UBS Global Asset Management (US) Inc. and UBS Securities LLC (together, UBS). In early 2007, Finkelstein received a bonus in the amount of $25 million based on the Fund’s 2006 performance. During the financial crisis that unfolded during 2007, the Fund showed losses of more than $300 million attributable to Finkelstein’s trades. Finkelstein’s trading authority was suspended. UBS closed the Fund and eventually terminated Finkelstein. UBS had an ERISA-governed severance plan in place and adopted a “Supplemental Program” for Fund employees who might not otherwise be eligible for bonuses due to the timing of the Fund’s closure. Eligible employees could receive a bonus equal to 25% of their 2006 bonus. Finkelstein put in a claim for a bonus in the amount of $6.25 million, which UBS denied based on the huge trading losses incurred by the Fund as of April 2007. Finkelstein submitted the claim to arbitration through FINRA Dispute Resolution. The arbitration panel denied his claim. Finkelstein then commenced an action in U.S. District Court seeking to overturn the arbitration decision. We summarize the District Court’s decision with respect to Finkelstein’s claim and the Court’s legal analysis.
Read Full Article … -
From Vol. 4 No.39 (Nov. 3, 2011)
Can an Arbitration Provision Signed by a Hedge Fund Manager, but Not by a Hedge Fund Director, Bind a Hedge Fund?
On September 29, 2011, Judge Elizabeth A. Kovachevich of the United States District Court for the Middle District of Florida issued an order (Order) compelling arbitration of 23 of the “clawback” actions brought by the receiver (Receiver) of Arthur Nadel’s fraudulent hedge funds to recover false profits from the funds’ investors. Following the discovery that Nadel was running a massive Ponzi scheme, the Receiver filed numerous such fraudulent conveyance actions against investors in an attempt to claw back any money withdrawn in excess of the investors’ capital contributions. On the differing treatment in bankruptcy between capital invested in a Ponzi scheme and withdrawals in excess of such capital contributions, see “Two Recent Federal Court Decisions Clarify the Differing Treatment under SIPA of Returned Principal and Fictitious Profits,” The Hedge Fund Law Report, Vol. 4, No. 34 (Sep. 29, 2011). Certain of the investors demanded that the suits against them be arbitrated as opposed to litigated. The Court ruled on the investors’ demands, and in doing so, addressed the question of whether the existence of an arbitration provision in a hedge fund document signed by a manager is sufficient, absent extraordinary circumstances, to force the fund to attack the validity of that document in front of an arbitrator as opposed to a judge.
Read Full Article … -
From Vol. 4 No.39 (Nov. 3, 2011)
Fund of Hedge Funds Aris Multi-Strategy Fund Wins Arbitration Award against Underlying Manager Based on Allegations of Self-Dealing
According to press reports, on September 28, 2011, Javier Guerra, the portfolio manager of Quantek Asset Management, LLC (QAM) and Quantek Opportunity Fund, LP (Partnership or Feeder Fund), resigned from the Partnership’s Board of Directors as a result of a loss in arbitration to fund of hedge funds investor Aris Multi-Strategy Fund (Aris). The arbitration panel reportedly concluded that QAM fraudulently induced Aris to invest in the Feeder Fund and ordered Guerra to pay $1 million in damages; Aris had invested $15 million in the Feeder Fund. This article details the relevant factual and legal allegations in publicly available court documents, and includes links to those documents. For more on litigation involving Aris, see “New York State Supreme Court Dismisses Hedge Funds of Funds’ Complaint against Accipiter Hedge Funds Based on Exculpatory Language in Accipiter Fund Documents and Absence of Fiduciary Duty ‘Among Constituent Limited Partners,’” The Hedge Fund Law Report, Vol. 3, No. 7 (Feb. 17, 2010); “New York Supreme Court Rules that Aris Multi-Strategy Funds’ Suit against Hedge Funds for Fraud May Proceed, but Negligence Claims are Preempted under Martin Act,” The Hedge Fund Law Report, Vol. 2, No. 51 (Dec. 23, 2009). For more on the views of Aris’ principals with respect to litigation by hedge fund investors against hedge fund managers, see “Why Are Most Hedge Fund Investors Reluctant to Sue Hedge Fund Managers, and What Are the Goals of Investors that Do Sue Managers?,” The Hedge Fund Law Report, Vol. 2, No. 52 (Dec. 30, 2009).
Read Full Article … -
From Vol. 4 No.28 (Aug. 19, 2011)
Arbitration Award in Connection with an Unceremonious Departure from Oaktree Capital Management Precludes Legal Malpractice Claim Against Attorney Retained to Advise on Departure
The partnership agreements and similar governing documents of many hedge fund management companies provide that disputes among partners will be subject to mandatory arbitration, sometimes with a potential appeal to court. But that potential appeal often turns out to be a right with little force: arbitration awards are rarely overturned on direct appeal, and – as this article discusses – can even have preclusive effect in collateral litigation. See, on the former point, “A Prime Broker that Fails to Diligently Investigate the Sources of Funds in a Hedge Fund’s Margin Account May Be Jointly and Severally Liable, with the Fund and Its Manager, for Fraud by the Manager, to the Extent of Funds in the Account,” The Hedge Fund Law Report, Vol. 3, No. 47 (Dec. 3, 2010).
Read Full Article … -
From Vol. 4 No.3 (Jan. 21, 2011)
California Appellate Court Upholds Arbitration Award Against Plaintiff Hedge Fund, Even Though One of the Defendant Law Firms in the Arbitration Never Filed a Separate Petition to Compel the Arbitration
A California appeals court has rejected an attempt by hedge fund Vigilant Investors, L.P. (Vigilant) to have a second bite at the apple after receiving an unfavorable arbitration award in an action against its former attorneys. In a legal fee and malpractice dispute arising out of Vigilant’s underlying action against its prime broker ABN Amro (which action was also arbitrated), Vigilant sued various attorneys and law firms that represented Vigilant in the underlying suit. Vigilant was dissatisfied with the arbitration award made in favor of one of those law firms and moved in California Superior Court to overturn the arbitration award, primarily on procedural grounds. The Superior Court upheld the award and Vigilant appealed. The Court of Appeal ruled that, because all parties had consented to the arbitration of all claims, Vigilant could not now challenge the arbitral award. We summarize the procedural background and the Court’s reasoning. For a recent discussion of the “exceedingly heavy burden” imposed by the Federal Arbitration Act on a party seeking to overturn an arbitration award, see “A Prime Broker that Fails to Diligently Investigate the Sources of Funds in a Hedge Fund’s Margin Account May Be Jointly and Severally Liable, with the Fund and Its Manager, for Fraud by the Manager, to the Extent of Funds in the Account” The Hedge Fund Law Report, Vol. 3, No. 47 (Dec. 3, 2010).
Read Full Article … -
From Vol. 3 No.18 (May 7, 2010)
N.Y. Appeals Court Rules that Securities Clearance Broker Cannot Compel Arbitration Against Hedge Fund 3V Capital Master Fund Ltd. Over Bankruptcy Trade Claims Litigation
On April 22, 2010, the New York State Supreme Court, Appellate Division, First Department, unanimously affirmed a trial court order dismissing a motion to compel arbitration by broker Imperial Capital LLC against distressed debt hedge fund 3V Capital Master Fund Ltd. 3V Capital faced a lawsuit by Deephaven Distressed Opportunities Trading, Ltd. and its affiliates for its alleged breach of a contract requiring it to purchase claims held by Deephaven against a bankruptcy estate. 3V Capital dragged Imperial, its securities clearance broker, and another hedge fund, Post Distressed Master Fund, L.P., which had promised but then failed to purchase those same claims from 3V Capital, into the lawsuit as third-party defendants. Since the litigation at issue involved Imperial’s actions as broker for an uncompleted sale of bankruptcy claims, the Appellate Division agreed with the trial court that the sale fell outside the narrow terms of the securities clearance brokerage arbitration agreement between 3V Capital and Imperial. This article details the background of the action and the court’s legal analysis.
Read Full Article … -
From Vol. 3 No.18 (May 7, 2010)
Massachusetts Courts Approve of Accounting Firm Rothstein Kass’ Role as Award Arbiter in Hedge Fund Management Fee Dispute
On April 21, 2010, the Appeals Court of Massachusetts affirmed the decision of the Suffolk County Superior Court of Massachusetts denying a hedge fund’s motion to remove Rothstein Kass & Company, P.C., as independent accountant and deemed arbiter in a management fee dispute. The dispute, between Rajesh and Neelam Idnani (Plaintiffs) and Vikas Mehrotra and his hedge funds Venus Capital Management (VCM), Venus Investment Partners, LLC and Venus Series Trust (together Defendants) had landed in arbitration. There, an arbitration panel had ordered Defendants to pay Plaintiffs either quarterly fees based on Defendants own internal financial report, or, if Plaintiffs’ rejected that report, based on an accounting by an independent third party. As a result, the report of the third-party accountant became the arbitration award, and that firm effectively became the arbitrator for all future disputes. Defendants challenged Plaintiffs’ decision to use Rothstein Kass as the third-party accountant because of perceived bias. The Superior Court rejected this claim. Also, the Appeals Court affirmed because Defendants failed to previously challenge the selection of Rothstein Kass in earlier litigation, and because the firm’s performance was free of “evident partiality,” as required to vacate an arbitrator’s award under the Massachusetts Uniform Arbitration Act. This article summarizes the background and legal analysis of the courts below.
Read Full Article … -
From Vol. 2 No.43 (Oct. 29, 2009)
Federal District Court Holds that Investor in Hedge Fund that Invested in Madoff Operation Must Arbitrate His Claims against the Financial Adviser Who Recommended Investment in the Hedge Fund
Plaintiff Larry Wald (Wald) had a long business relationship with defendants 1 Financial Marketplace Securities, LLC (1 Financial Securities), and its Chief Executive Officer, Kevin M. Ross (Ross). In 2002, in connection with the opening of an IRA account, Wald signed client account forms required by 1 Financial Securities. The agreement contained a provision that called for any dispute “arising out of or relating to your business or this agreement” to be submitted to arbitration. From 2007 through February 2008, Ross solicited investments by Wald in a hedge fund run by affiliates of the defendants. The fund turned out to be a Madoff feeder fund and Wald’s entire investment was lost. Wald sued the defendants in federal court, alleging various counts of federal and state securities fraud, breach of fiduciary duty, breach of contract and similar claims. Defendants, pointing to the arbitration clause in the client agreement, moved to compel arbitration. On October 5, 2009, the district court agreed that the arbitration clause was applicable to Wald’s claims, even though the investment was not made through 1 Financial Securities, and directed the parties to arbitrate the dispute. This article examines the relevant facts and explains the court’s reasoning.
Read Full Article … -
From Vol. 2 No.8 (Feb. 26, 2009)
Suit by PayPal Founder and Macro Hedge Fund Manager Against Minority Investor in his Hedge Fund for Extortion Stayed Pending Arbitration of Related Fraud Suit Against the Hedge Fund
On November 12, 2008, a lawsuit filed by macro hedge fund management company Clarium Capital Management LLC, and its principle shareholder, PayPal founder Peter A. Thiel, in California state court against the agent of Amisil Holdings, Ltd., Amit Choudhury, was removed to the United States District Court for the Northern District of California. In the state and now federal action, Clarium and Thiel complained that Choudhury committed acts of defamation, tortious interference with business advantage, fraud and negligent misrepresentation, and that he violated the California Business and Professions Code. Choudhury moved for a Stay Action Pending Arbitration, because his firm, Amisil, had submitted to arbitration an outstanding and closely related lawsuit against Clarium and Thiel involving the same or similar claims. The District Court agreed with Choudhury and imposed the stay. Our discussion of the facts and legal analysis in the opinion shows, among other things, how courts may construe mandatory arbitration provisions in the operating agreements of hedge fund management companies.
Read Full Article …