Manager and Service Provider Liability – Where are we now?World Alternative Investment Summit Canada 2010Ingrid Pierce, Walkers

Overview

• Claims against directors

• Claims against the fund

• Third party service providers

• Auditor cases

• Administrators cases

• Investment manager liability

• New investor powers to liquidate funds

Where Are We Now?

• Litigation arising out of fund collapses and liquidity management

• Service providers in the firing line as investors seek to attribute blame and recoup losses

• Absence of contract between investors and third party service providers

• Other remedies may depend on jurisdiction

• Scope of protection afforded by indemnities and releases in service provider contracts

Claims Against Directors

• Responsibility for general oversight of the fund and all major decisions

• Cause the fund to hire third party service providers and negotiate agreements

• Duty to act in good faith in the best interests of the fund

• Fiduciary duties to the fund and not to individual investors

Claims Against Directors (cont)

• Democratic principle – majority rule

• No specific rights for minority shareholders unless derivative and wrongdoers are in control

• Directors and officers may be exonerated under constitution or directors’ services agreement

• No exoneration or indemnity for dishonesty

Claims Against the Fund

• Investor who never would have invested must first rescind subscription contract

• Bars to rescission

• Breach of class rights

• Breach of subscription agreement, representations or warranties

• Breach of offering document – contract or not?

• Damages?

Claims Against Service Providers

• No contract with the third party service providers

• Standard of care – reasonably competent professional with relevant expertise

• Can investors sue for negligence or misrepresentation inducing the subscription contract?

• Fund’s constitution: can service provider benefit from indemnity in articles?

• Limitations of liability and caps on liability

• Time limits for claims

Claims Against Auditors

• No contract between auditors and investors

• Engagement letter may limit liability

• Fund’s constitution may designate auditors as “officers”

• Recent litigation – auditor liability for negligent conduct of audit

• Class action claims against auditors arising out of Madoff

• Was the audit so deficient as to amount to no audit at all?

Claims Against Administrators

• No contract between administrators and investors

• Consider liability and indemnity under administration agreement

• Is there a special relationship between the administrator and investors?

• Do investors invest because of the chosen administrator?

• Recent litigation – alleged failure to calculate NAV or provide independent verification of prices

Claims Against Investment Managers

• No contract between investment manager and investors

• Did manager induce investor to invest?

• When is a sales pitch a material representation?

• Contractual limitation of liability and indemnity from fund assets

• Fund articles– can investment manager take advantage of indemnities?

• Recent litigation

Investors’ Powers to Liquidate Funds

• New wider powers to wind up companies if “just and equitable”

• Abusive for an investor to threaten winding up in order to improperly pressure fund

• Court has power to liquidate fund if impossible for fund to carry out investment objective

• Options for funds still holding illiquid securities

Lessons

• Investors and creditors taking a harder line with service providers

• Ensure duties spelled out in clear terms

• Review and update liability provisions over time

• Limit direct dealings with investors

Walker House 87 Mary Street, George Town

Grand Cayman KY1-9001 Cayman Islands

T +1 345 949 0100E info@walkersglobal.com

Ingrid PiercePartner and Head of the Cayman Investment Funds TeamT +1 345 814 4667 ]E ingrid.pierce@walkersglobal.com