Broadly Defined Terms in a Term Sheet Covering Employment of a General Counsel May Render Hedge Fund Manager Principal Personally Liable for Unpaid Compensation

Dow Kim sought to launch hedge fund management company Diamond Lake Investment Group with a sterling resume, a high caliber team and great expectations.  But timing worked against Kim.  He launched in late 2007, into a perfect financial storm, when the vast majority of potential hedge fund investors were trying to get their money back rather than trying to deploy it.  A recent decision from New York’s intermediate appellate court held that Kim may have breached a contract and violated New York’s Labor Law by withholding compensation from the person he brought on board as general counsel of the management company.  But the interesting thing about the decision – or one of various interesting things – is that there was no contract.  There was only a term sheet; and that term sheet contained broad definitions of key terms that may render Kim liable for over $2 million in compensation obligations.  This article describes the factual background and legal analysis in the opinion, and makes four observations relevant to the drafting of hedge fund manager employment agreements and term sheets.  At least one other former employee of the short-lived Diamond Lake venture has taken his employment-related grievances to court.  See “After Hedge Fund Folds, Ex-Portfolio Manager Sues Its Founder, Dow Kim, in Federal Court for Fraud and Negligent Misrepresentation in Inducing Him to Join the Venture,” Hedge Fund Law Report, Vol. 3, No. 32 (Aug. 13, 2010).  See generally “Key Legal Considerations in Connection with the Movement of Talent from Proprietary Trading Desks to Start-Up or Existing Hedge Fund Managers: The Hedge Fund Manager Perspective (Part Three of Three),” Hedge Fund Law Report, Vol. 4, No. 4 (Feb. 3, 2011).

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