Massachusetts’ highest court, the Supreme Judicial Court (Court), recently handed down a ruling in a case in which Jack Welch, the legendary former CEO of GE, sued the founder of a hedge fund manager after suffering nearly $7 million in losses in one of the manager’s funds. Welch claimed that the principal failed to disclose his involvement in housing-related litigation that occurred several years before Welch invested in the fund. Welch claimed he made his investment, nearly all of which he subsequently lost, based in large part on the principal’s character. Had he known that the principal “had made threats to people and their property, I would have run so far from a character like this, and I would not put a dollar in there.” The case raises an interesting question recently explored by academics and financial commentators: How relevant are an executive’s personal legal disputes to issues like securities fraud, or, in legal terms, are such personal disputes material to an investor’s consideration of a fund investment? The Court’s decision sheds some light on this question, which in turn is relevant to investors in hedge funds. Accordingly, this article summarizes the Court’s decision as well as a New York Times article describing the results of an academic study on whether executives who are willing to violate non-securities laws in their day-to-day lives are more likely to violate securities laws. For a discussion of materiality in a different but related context, see “Are Hedge Fund Managers Required to Disclose the Existence or Outcome of Regulatory Examinations to Current or Potential Investors?
,” Hedge Fund Law Report, Vol. 4, No. 32 (Sep. 16, 2011).