Investors sought to recover losses stemming from the liquidation of two British Virgin Islands-based hedge funds (Funds) in which they held shares.  In the most recent decision in the ongoing litigation involving the failed hedge funds managed by Lancer Management Group, LLC (Lancer), the United States District Court for the Southern District of New York ruled that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) did not preempt state claims against the directors and administrators of the Funds for allegations of material misstatements in connection with the purchase or sale of a covered security.  This was because the court ruled that the shares issued by the Funds were not “covered securities” under the SLUSA. Rather, the securities were merely held in portfolios.  We detail the background of the allegations and the court’s legal analysis.  See also “Pension Committee Case Highlights Obligations of Hedge Fund Managers to Preserve Documents and Information in Anticipation of Litigation,” Hedge Fund Law Report, Vol. 3, No. 6 (Feb. 11, 2010).