A perennial question in the case of hedge fund frauds is: How wide is the scope of civil liability? A hedge fund manager that engages in fraud is almost definitely liable civilly, but frequently has few or no assets to satisfy a judgment. (A criminal conviction of a manager that engages in fraud may offer symbolic satisfaction to investors, but cannot make investors whole.) On the other hand, the chain of culpability connecting a hedge fund service provider to a fraud is often attenuated, but service providers usually remain robustly solvent even after a client is exposed as a fraud. Therefore, in the wake of hedge fund frauds, investors have sued service providers (e.g., law or accounting firms) in an effort to recoup losses. See “SEC Receiver for Arthur Nadel’s Scoop Capital Hedge Funds Moves to Settle Malpractice Claim Against Law Firm Holland & Knight
,” Hedge Fund Law Report, Vol. 5, No. 36 (Sep. 20, 2012). Investor claims against hedge fund service providers are often tenuous, but offer a real possibility to collect on any judgment. A recent federal court decision illustrates these themes in connection with a malpractice suit brought against law firm Winston & Strawn (W&S) by the trustee of the estate of bankrupt hedge funds. This article discusses the factual background in the action; the trustee’s claims against W&S; and the Court’s decision and analysis.