Posted on 08/15/2007 9:06:33 PM PDT by TigerLikesRooster
$4 Billion Suit Against Akin Gump Highlights Hedge Fund Representation Risks
Wednesday August 15, 3:02 am ET
Anthony Lin, New York Law Journal
Like most hedge fund managers, James McBride and Kevin Larson expected to make a tidy sum. By the fall of 2003, they seemed well on their way. The series of Veras funds they had launched less than two years before had already attracted around $1 billion in investments. ADVERTISEMENT
But then regulators, including then-New York state Attorney General Eliot Spitzer and the Securities and Exchange Commission, came after the Veras funds for "late trading," the illegal purchasing of mutual fund shares after the 4 p.m. market close. Veras wound up paying more than $36 million in penalties before shutting down. McBride and Larson each paid $750,000 and were barred from the industry.
But the ex-fund managers are still out for big money, this time from the law firm they claim advised them that late trading was legal. In February, the former hedge fund managers filed suit against Akin Gump Strauss Hauer & Feld in Manhattan Supreme Court.
Their damages claim? A whopping $4.4 billion, not including punitive damages.
Akin Gump has denounced the suit.
"The allegations of wrongdoing in Veras' Complaint are without merit. At all times, Akin Gump acted ethically and in its client's best interests," said firm spokeswoman Kristen White. "Akin Gump is forcefully defending this case, and we are confident we will prevail."
The suit illustrates the risks law firms face as they try to reap the rewards of representing private investment funds, including hedge funds and private equity funds. Such funds generate high legal bills for firms, but they are apt to strike back hard when they feel lawyers have led them astray.
In addition to the Veras suit against Akin Gump, top private equity firm Thomas H. Lee has sued Mayer, Brown, Rowe & Maw for $245 million for allegedly misrepresenting the financial shape of commodities brokerage Refco prior to Lee's acquisition of a controlling interest. Seward & Kissel is also a defendant in a $200 million lawsuit brought by institutional investors who lost money when one of the law firm's hedge fund clients went under.
There are a number of reasons investment fund clients may be more willing to bite the hand that lawyers them when things go wrong. For one thing, there is almost always a lot of money on the line, and given the nature of their business, investment fund principals experience losses in a more visceral way than, say, corporate executives.
"It's up close and personal," said Leslie D. Corwin, a partner at Greenberg Traurig specializing in business disputes involving law firms. When fund principals' expectations of making massive amounts of money are thwarted, he said, they cast around for people to blame.
Law firms are more in the line of fire because they play a much bigger role at investment funds than they do for corporate clients. Even though funds may control companies with large in-house legal departments, they sometimes lack even a general counsel themselves. They therefore develop unusually close relationships with outside lawyers, and feelings can be unusually hard when things do not go well.
"Hedge funds are oftentimes run as if they are small businesses, so every decision matters a lot more to the proprietor," said Barry Barbash, head of the funds practice at Willkie Farr & Gallagher. "The client relationships are more intense and can become more confrontational."
Barbash said the hectic nature of the hedge fund business creates many stressful and difficult situations for lawyers. Fund managers often call wanting to know right away if they can make a trade or not, leaving the lawyer feeling responsible for the outcome.
"I feel a lot of times like the closer on the mound," said Barbash.
ADVICE ON LATE TRADING
Trading advice is at the core of the Veras suit against Akin Gump. McBride and Larson, former employees of the wealthy Koch family's private investment arm, retained Eliot D. Raffkind, a partner in Akin Gump's Dallas office, to represent their fledgling Houston-based hedge fund in 2001. According to the complaint, McBride explained to Raffkind that the hedge fund's primary investment strategy was the short-term trading of mutual fund shares to capture pricing inefficiencies.
The partner allegedly blessed the two trading practices later deemed illegal by the New York attorney general's office and the SEC. The first was Veras' striking of so-called "timing capacity" agreements with certain mutual funds, who permitted short-term trading in some of their funds in exchange for long-term investments in others.
The second was "late trading." The lawsuit claims Raffkind was informed in the fall of 2002 that several brokers were letting Veras place orders after 4 p.m. The lawyer allegedly said the practice was legal as was the brokers' means of giving preferential treatment to a large client. According to the complaint, Raffkind also said there was no expectation that late-trading investors would "ignore the world around them" and that Veras was free to consider information acquired after the market closed in making its late trades.
In March 2003, McBride claims he himself first raised the issue of whether late trading would violate Rule 22c-1 of the Investment Company Act of 1940. The suit claims it was "a rule that Raffkind had never mentioned to the Veras principals and of which he apparently was previously unaware."
The rule states that securities must be priced based on the next computation of their net asset value after a purchase order has been placed. Raffkind allegedly told the Veras principals that the rule did not apply to them because it only explicitly refers to issuers and underwriters. According to the suit, he later told them it might be wise to limit late trading to before 6 p.m., when mutual fund net asset values were calculated.
Raffkind allegedly continued to reassure Veras that these practices were legal even as regulators began interviewing brokers who had facilitated late trading in late August 2003. The Veras principals claim they requested a written legal opinion on the subject, for which they were billed by the firm but did not receive. Veras was subpoenaed by Spitzer's office on Sept. 11, 2003.
The Veras principals contend Akin Gump then ignored clear conflicts of interest by representing Veras in regulatory investigations. The lawsuit claims Akin Gump lawyers, led by New York partner James J. Benjamin, pushed for a settlement with the state attorney general and the SEC in an amount that was almost three times what was ultimately paid in order to avoid disclosing the extent of the advice given by Raffkind.
Benjamin and another partner, Richard Zabel, allegedly told McBride and Larson that Raffkind did not recall giving any advice on late trading in late 2002, and that they should not tell regulators they had relied on his counsel. Benjamin allegedly shook his head when Larson went ahead and told government lawyers at a proffer session that Veras was advised by Raffkind early on that late trading was legal.
The Veras managers claim that, after new counsel informed regulators in January 2005 about the legal advice provided by Akin Gump, a previous $98.4 million settlement demand was dropped to the $36.7 million Veras agreed to pay. Previously threatened criminal charges by the attorney general were also dropped.
'IMPECCABLE REPUTATIONS'
Peters of Akin Gump said the firm stood behind Raffkind, Benjamin and the several other Akin Gump partners and associates mentioned in the complaint.
"It is unfortunate that distinguished attorneys have been named in such an action. We are proud to have these attorneys, who have impeccable reputations for integrity and professionalism, as Akin Gump partners," she said.
She also noted that the firm has not been sued by any other hedge funds.
The firm has moved to dismiss several of Veras' 11 counts. Claims for gross negligence, breach of fiduciary duty and negligent misrepresentation are duplicative of the legal malpractice claim, the firm says.
The motion to dismiss also claims the Veras principals signed a valid conflict waiver. Though the plaintiffs have claimed the waiver is invalid because they signed it under duress in the heat of the investigation, Akin Gump has pointed out the Veras managers had separate counsel who vetted the waivers before they were signed.
Akin Gump is being represented by Philip Forlenza of Patterson, Belknap, Webb & Tyler. Veras' lawyer is Linda M. Marino of Flemming Zulack Williamson Zauderer. Marino declined to comment.
The outsized damages request reflects the massive financial ambitions of hedge fund managers. Charging both a percentage on the total funds in their portfolio, and another, much higher percentage on any gains, leading hedge funds with billions in assets can generate billions in annual pay for their managers.
If not for Akin Gump's representation, the Veras principals say they "would still be in business, would not have had to pay more than $36,000,000 . . . would not have lost hundreds of millions of dollars in past and future, as well as their reputations and their livelihoods, and would not have paid millions of dollars in legal fees, including approximately $5,000,000 in legal fees to Akin Gump."
CLAIMS NEW TO FIRMS
Such damages claims are new to law firms, though. In a typical securities class action, a law firm is a minor defendant after deep-pocketed financial institutions. Plaintiffs lawyers, knowing the limits of most law firms' professional liability insurance and wary of getting bogged down in litigation over partners' personal assets, take what they can get from firms, generally less than $30 million.
The Lee suit against Mayer Brown may be particularly worrying in that regard. The proverbial deep-pocketed client, the high-flying buyout firm has asked not a contingent-fee plaintiffs firm but pricey corporate firm Weil, Gotshal & Manges to go after Mayer Brown.
Lee claims Mayer Brown, Refco's regular outside counsel, knew about the fraudulent transactions that ultimately led to the company's collapse. The suit claims the law firm concealed its knowledge during the due diligence leading up to Lee's purchase of a controlling interest in Refco.
Like the Veras suit, Lee's complaint is fueled by a thwarted chance at making a vast sum of money. Lee, which executed one of the iconic private equity deals when it bought Snapple Beverage Co. in 1993 for $135 million and sold it two years later for $1.7 billion, had no doubt hoped for a similar outcome when it acquired its stake in Refco. Instead, Refco ended up in bankruptcy weeks after its initial public offering and Lee ended up with egg on its face. It is also facing a massive suit itself by Refco's bankruptcy trustee.
Corwin said some firms are taking measures to protect partners involved in investment funds practice. Though most firms now operate as limited liability partnerships, meaning only partners directly involved in a matter can be held personally liable, Corwin said additional indemnification agreements are becoming common. Through such agreements, he said, partners contractually bound themselves to support those of their colleagues working in risky but highly lucrative practices.
"Any law firm that's going to handle these types of transactions has to be completely on their toes," said Corwin.
Hedge fund and lawyers going at each other, and in the process lawyers going at each other. Things are getting interesting.
Scumbag lawyers vs. unethical stock traders ... who to cheer for?
My vote will always go to whoever attacks the utterly evil lawyer industry.
Note that the "Strauss" in Akin Gump's name is Bob Strauss, former head of the DNC. In addition to Strauss, firm lawyers have included:
Vernon Jordan, Bill Clinton's buddy who helped Monica Lewinsky,
Open Borders Ken Mehlman, former RINO head of the RNC.
Tom Foley, former U.S. Speaker of the House (Democrat).
Tommy Thompson, who just got his clock cleaned in an Iowa straw poll
George P. Bush ... the Great Hispanic Hope of the Bush family who attacks the U.S. Border Patrol and promotes open borders like his uncle.
Post #4: awesome catch. The corrupt power elite at work. Party labels don’t mean much when there is serious crooked money to be made by the ruling class.
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