District Court Suggests That Prime Brokers May Have Expanded Due Diligence Obligations

On November 8, 2010, the U.S. District Court for the Southern District of New York denied a petition by Goldman Sachs Execution & Clearing, L.P. (GSEC) to vacate a Financial Industry Regulatory Authority (FINRA) arbitration award ordering it to pay $20.58 million to the Official Unsecured Creditors' Committee of Bayou Group, LLC and others (Bayou Estate).  The court also granted a cross-petition by the Bayou Estate to confirm the award.  Importantly, the court noted that final judgment would not be entered in the case until the court issues an opinion setting forth the reasons for its ruling.  We are monitoring the docket for that opinion, and – in light of the importance of this case to the hedge fund community – will report on the opinion shortly after it is issued.  The opinion may expand the range of circumstances in which a prime broker has a legal obligation to investigate red flags suggesting potential fraud at a hedge fund customer, and to act on its findings.  See “In Petition to Vacate FINRA Arbitration Award, Goldman Seeks to Define the Scope of a Prime Broker’s Duty (If Any) to Investors in a Hedge Fund that is a Customer of the Prime Broker,” Hedge Fund Law Report, Vol. 3, No. 30 (Jul. 30, 2010).

To read the full article

Continue reading your article with a HFLR subscription.