New York Court Rules that Limited Partners of Collapsed Hedge Fund Cannot Sue Fund’s Outside Legal Counsel for Fraud and Breach of Fiduciary Duty

In the continuing saga over the 2005 collapse of Wood River Partners, L.P. (the Fund), which suffered huge losses by reason of its highly-concentrated bet on Endwave Corporation (Endwave), New York’s highest court affirmed the dismissal of a complaint filed by limited partners of the Fund against Seward & Kissel, LLP (S&K), which served as outside legal counsel to the Fund.  The Court of Appeals held that the limited partners failed to plead the alleged fraud by S&K with sufficient particularity.  It also ruled that outside counsel to a limited partnership owes a fiduciary duty only to the partnership itself, not to its individual limited partners.  We provide a detailed discussion of the facts of the case and the court’s legal analysis.  The case offers a rare statement on hedge fund law from the highest court of a U.S. state in which many hedge funds are domiciled, and in which the vast majority of hedge funds conduct business.  As such, the case includes important and widely-applicable insights on the scope of a hedge fund manager’s fiduciary duty, and the limits on the potential liability of service providers to hedge funds.

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