Can an Arbitration Provision Signed by a Hedge Fund Manager, but Not by a Hedge Fund Director, Bind a Hedge Fund?

On September 29, 2011, Judge Elizabeth A. Kovachevich of the United States District Court for the Middle District of Florida issued an order (Order) compelling arbitration of 23 of the “clawback” actions brought by the receiver (Receiver) of Arthur Nadel’s fraudulent hedge funds to recover false profits from the funds’ investors.  Following the discovery that Nadel was running a massive Ponzi scheme, the Receiver filed numerous such fraudulent conveyance actions against investors in an attempt to claw back any money withdrawn in excess of the investors’ capital contributions.  On the differing treatment in bankruptcy between capital invested in a Ponzi scheme and withdrawals in excess of such capital contributions, see “Two Recent Federal Court Decisions Clarify the Differing Treatment under SIPA of Returned Principal and Fictitious Profits,” Hedge Fund Law Report, Vol. 4, No. 34 (Sep. 29, 2011).  Certain of the investors demanded that the suits against them be arbitrated as opposed to litigated.  The Court ruled on the investors’ demands, and in doing so, addressed the question of whether the existence of an arbitration provision in a hedge fund document signed by a manager is sufficient, absent extraordinary circumstances, to force the fund to attack the validity of that document in front of an arbitrator as opposed to a judge.

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