Partners Theresa Davis and Gary Howell Quoted in Hedge Fund Law Report on Class Actions Related to Madoff Investments

Theresa Davis and Gary Howell, partners in the firm’s Litigation and Dispute Resolution Practice and Employee Benefits and Executive Compensation Practice, respectively, were quoted in an article in Hedge Fund Law Report on a recent class action filed by a pension fund in relation to losses on securities controlled by Bernard Madoff. “Many of the recent decisions demonstrate that the types of class action we are seeing arise out of the Madoff matter are going to encounter significant difficulties,” Ms. Davis says. “Class certification is likely to be challenged if there are significant institutional investors among the purported class members, and depending of course on the specific facts such a challenge may be successful.”

Many hedge funds seek to avoid regulation under ERISA by limiting investments by or on behalf of benefit plan investors to below 25 percent of the value of each class of equity interests issued by the managed funds. Congress amended ERISA in 2006 to exclude certain plans, which has made compliance slightly easier. Mr. Howell explains, “Assume that a hedge fund enters into a swap with large Bank X. Bank X or an affiliate is likely to have some kind of service provider relationship with one or more of the plans invested in the fund: it may be a custodian, may manage other assets of the same plan or may be a plan trustee. In any of these cases, Bank X would be a ‘party of interest’ with regard to the plan, and therefore the swap may be prohibited. A hedge fund that comes within the scope of ERISA could still enter into the swap with Bank X if it could bring the swap within one of the statutory exemptions. However, a far easier approach, where practicable, is to stay below the 25 percent threshold. Those kinds of considerations drive the decision, generally.” (“Class Action Suit Against Hedge Fund that Invested in Madoff Feeder Fund Highlights the Standard of Care to which ERISA Fiduciaries are Held,” July 8, 2009)