Federal Court Decision Provides Guidance to Newly Registered Hedge Fund Managers on Litigation Strategy in Enforcement Actions Brought by the SEC

On December 2, 2010, Magistrate Judge Sheila Finnegan of the U.S. District Court for the Northern District of Illinois issued an order partially granting a discovery motion filed by Eric A. Bloom, the former President and CEO of Sentinel Management Group, Inc., a registered investment adviser, in a civil enforcement action brought by the U.S. Securities and Exchange Commission (SEC) against Sentinel, Bloom and Sentinel Senior Vice President Charles K. Mosley.  The SEC had accused Bloom and Mosley of engaging in a massive fraud from around October 2002 through August 2007 relating to their use of client assets.  In response, Bloom sought the SEC’s file for Sentinel from an examination it conducted in January and February 2002, in the hope that it may contain relevant information, and sought answers to his interrogatories relating to any witness interviews the SEC conducted with Sentinel staff in preparation for litigation.  Although Sentinel was a registered investment adviser that managed cash for hedge funds, rather than being a hedge fund manager itself, this decision is nonetheless relevant to hedge fund managers, especially as more hedge fund managers become subject to a registration requirement, SEC examinations and resulting enforcement actions.  Specifically, the decision sheds light on the merits of a litigation strategy adopted by a hedge fund industry participant and its principals in litigation against the SEC.  Thus, the decision offers lessons regarding when to litigate or settle, how to craft a litigation strategy, and which documents may be obtained via discovery requests.  We detail the background of the action and the court’s pertinent legal analysis.

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