Illinois District Court Dismisses Investors’ Fraud Claims Against Hedge Fund Sitara Partners, L.P. Because of Improper Pleading and Timing of Alleged Misrepresentations

Plaintiffs invested in hedge fund Sitara Partners, L.P. (Fund) in 2005 and 2006.  After their investment, defendant Rajiv Patel (Patel), who was the Fund’s principal, allegedly promised the plaintiffs that he had invested in a diversified portfolio of “quality securities.”  In fact, on September 2, 2008, Patel made a huge bet – 90% of the Fund’s assets – on Freddie Mac, which lost most of its value after the federal government’s takeover.  Plaintiffs lost over 75% of their investment and commenced an action against Patel and the Fund’s manager, Sitara Capital Management, LLC.  Plaintiffs alleged eighteen separate counts against the defendants for fraud, violations of both state and federal securities laws, breach of contract, breach of fiduciary duty and negligence.  Defendants moved to dismiss the entire complaint.  The court dismissed all of plaintiffs’ claims except those based on defendants’ alleged sale of unregistered securities and acting as an unregistered investment adviser.  In addition to having a poorly drafted complaint, a fundamental problem was that most of plaintiffs’ claims were based on statements that Patel made after plaintiffs had already invested in the Fund, and such statements cannot form the basis of an action for securities fraud.  However, the court gave plaintiffs leave to replead most of the dismissed claims, and essentially instructed the plaintiffs on how to survive at the pleading stage.  We outline the claims made and the court’s rationale in deciding the motion to dismiss.

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