NY: Underlying Securities Fraud
Facts: Plaintiffs are limited partners in a hedge fund that was managed by John Whittier. Plaintiffs allege that the hedge fund’s offering memorandum asserted the following:
1) That the hedge fund will be audited by American Express Tax and Business Services, Inc.(TBS).
2) To ensure adequate investment diversification, individual holdings in the fund’s portfolio would be capped at 10% of the total assets at any given time, based on the original cost of the stock.
Unbeknownst to plaintiffs, the hedge fund—at Whittier’s direction—began to invest heavily in the stock of Endwave Corporation. By the summer of 2005, Wood River’s investment in Endwave shares represented approximately 65% of the fund’s total assets and over 35% of Endwave’s outstanding shares. After peaking at $54 per share in mid-July, Endwave’s share price gradually declined until it plummeted to $14 in late September. As a result, Whittier was unable to meet plaintiffs’ redemption requests.
The offering memorandum had been prepared by defendant- law firm. Plaintiffs allege that the law firm was aware that the hedge fund was not represented by TBS, and that the law firm was aware that the hedge fund had invested more than the 10% cap, and that they had violated SEC laws. Plaintiffs allege that defendants had a duty to disclose this information to them
Issue: Did the law firm have a fiduciary duty to the limited partners?
Ruling: No. The court held that the fiduciary duties owed by a limited partnership’s attorney to that entity do not extend to the limited partners.
Lesson: In order to maintain a legal malpractice claim against an attorney the attorney must have a fiduciary duty to plaintiff. As a limited partner, one cannot rely on the fiduciary duty owed to the entity as it does not extend to the limited partners.