Sixth Circuit Rules that a Hedge Fund Adviser Can Owe a Fiduciary Duty Not Only to the Fund, But Also to Fund Investors

On July 14, 2010, the United States Court of Appeals for the Sixth Circuit upheld a conviction against Mark D. Lay for investment adviser fraud, mail and wire fraud, and for engaging in deceptive and manipulative practices relating to the Ohio Bureau of Workers’ Compensation (OBWC), which was an investor in a hedge fund he managed.  The government accused Lay of ignoring a leverage cap in the OBWC advisory agreement, of failing to disclose how he exceeded that cap to OBWC, and of causing OBWC to lose $212 million as a result.  For his part, Lay argued in the district court and on appeal that in his role as hedge fund adviser, he had a fiduciary duty to the hedge fund, but not to the OBWC, thereby rendering certain jury instructions at his trial improper, and invalidating his conviction on the grounds of insufficient evidence.  On May 13, 2008, the United States District Court for the Northern District of Ohio rejected his motion for judgment of acquittal.  The Court of Appeals affirmed that decision, holding that “Because a hedge fund adviser can, in some circumstances, have a fiduciary relationship with an investor, the jury instructions were correct and sufficient evidence supports Lay’s conviction” for investment adviser fraud.  Concurring in that judgment, one judge dissented in part on the grounds that the government had failed, as a factual matter, to prove mail and wire fraud.  This article summarizes the background of the action, the Court’s legal analysis, and the implications for the scope of a hedge fund manager’s fiduciary duties.

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