Date: Thursday, January 22, 2009
Author: Legal Brief Today

Loopholes in partnership law could allow investors to sue individual hedge fund managers - and possibly partners in law firms - for giving bad investment advice.

Jérôme de Lavenère Lussan, MD of London law firm Lussan, says in a Law Gazette report that, if investors can prove that individuals who managed a collapsed hedge fund misled them when asking for investment, the latter could be liable under partnership law - even if they claim to be members of limited liability partnerships. Such a move, says the report, would mark a departure from the usual approach of reclaiming money from collapsed hedge funds. It points out that with a typical UK hedge fund, funds themselves are held in offshore tax havens, with employees based in the UK. In the event of a collapse, claims are normally made against the offshore funds rather than the onshore employees, who claim protection through their limited liability status. However, according to de Lavenère Lussan, if onshore employees of a hedge fund act in a management rather than an advisory capacity, and fail to advise investors that they are not liable for the consequences of investment advice, then they effectively lose their protection under the Limited Liability Partnerships Act 2000.

Full Law Gazette Report below:

Liability fears over bad advice:

Loopholes in partnership law could allow investors to sue individual hedge fund managers - and possibly partners in law firms - for giving bad investment advice, according to a former hedge fund chief operating officer.

Jérôme de Lavenère Lussan, managing director of London law firm Lussan, said this week that, if investors can prove that individuals who managed a collapsed hedge fund misled them when asking for investment, the latter could be liable under partnership law - even if they claim to be members of limited liability partnerships.
Such a move would mark a departure from the usual approach of reclaiming money from collapsed hedge funds.

With a typical UK hedge fund, funds themselves are held in offshore tax havens, with employees based in the UK. In the event of a collapse, claims are normally made against the offshore funds rather than the onshore employees, who claim protection through their limited liability status.

However, de Lavenère Lussan told the Gazette that, if onshore employees of a hedge fund act in a management rather than an advisory capacity, and fail to advise investors that they are not liable for the consequences of investment advice, then they effectively lose their protection under the Limited Liability Partnerships Act 2000.

Instead, they would be deemed to be partners and, therefore, liable for investors’ losses. He is currently advising clients on using this course of action ahead of a legal challenge.

‘The key is finding out whether [hedge fund] employees gave a disclaimer saying the advice they gave to investors could not be relied upon - for example, when giving a PowerPoint presentation on the fund,’ he said. ‘If they did not give a disclaimer, they could be open to action.

‘The LLP Act is a very short document and has not been tested in this manner. I have seen deeds from different hedge funds that claim to be limited liability partnerships, but look much more like a limited partnership document.’

He said law firms could be exposed if they convert from limited partnership status but did not alter their deed of partnership to reflect the changes properly.