Hedge Fund Service Providers Must Exercise Caution When Communicating With Investors or Face Liability

A recent unanimous decision reinstated a hedge-fund investor’s negligent misrepresentation claim against a fund manager’s outside counsel. Although some coverage suggests that the decision represents a departure from New York law’s established “near-privity” requirement for negligent misrepresentation claims, the decision is consistent with prior case law. It also serves as a reminder of the care that hedge-fund service providers must exercise in dealing with a fund’s investors and potential investors. In a guest article, Anne E. Beaumont and Nora Bojar, partner and associate, respectively, at Friedman Kaplan Seiler & Adelman, discuss the case, negligent misrepresentation claims by hedge fund investors against service providers and lessons for hedge fund service providers. For additional insight from Beaumont, see “BDC Finance v. Barclays: Derivatives Collateral Calls in a Chaotic Market” (Mar. 19, 2015); “Eighteen Major Banks Agree to Adopt FSB/ISDA Resolution Stay Protocol That Postpones Exercise of Right to Terminate Derivatives on Bank Counterparty Failure” (Nov. 20, 2014); “The 1992 ISDA Master Agreement Says Notice Can Be Given Using an ‘Electronic Messaging System’; If You Think That Means ‘Email,’ Think Again” (May 23, 2014); and “Five Steps for Proactively Managing OTC Derivatives Documentation Risk” (Apr. 25, 2014).

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