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Financial Institution Claims & Loss Scenarios

Hedge Fund Claims & Loss Scenarios

Investor Suit Alleges Misrepresentations & Inadequate Disclosure
DESCRIPTION OF EVENT

A pension investor, citing federal and state securities laws, sued a hedge fund, its investment manager, and several employees for inadequate disclosure, misrepresentations, gross negligence, breach of contract, and breach of fiduciary duty. The pension investor alleged that the fund manager: Entered into a series of concentrated, illiquid, and risky investments that were contrary to statements made to the investor that the fund would be diversified and risk-controlled; Did not communicate material changes to its investment strategy and the risks associated with the changes; When questioned by the investor, repeatedly maintained that the investment manager was monitoring and controlling risk, and specifically avoided any overconcentration of investments; and Failed to apply basic risk management techniques and controls to the investments. The pension investor claimed that had the risks, concentration, and strategy shift been disclosed, it would have redeemed their investment from the fund and avoided a loss of more than half its investment in less than three months.

RESOLUTION

Although the fund and investment manager argued that everything they did was permissible within the fund documents and agreements, they settled the case for $10 million; the firm paid $6 million in defense costs.

Revalued Securities Trigger SEC Investigation and Multiple Lawsuits" state
DESCRIPTION OF EVENT

The adviser of two mutual funds used an independent pricing service to value certain fund securities, including illiquid and difficult-to-value securities. The valuations provided by the pricing service indicated a material drop in values that caused the net asset value of the fund to drop by double digits in a single day. This significant drop in value worried some investors and caused a sudden demand in fund redemptions, which put pressure on the fund to sell securities held by the fund. As a result, the adviser announced the appointment of a pricing committee that would revalue the securities of the two funds based on fair-value pricing procedures. Citing overall market liquidity conditions due to credit quality concerns and a lack of demand, the pricing committee re-priced the securities held by the two funds. As a result, the share prices for the funds dropped materially once again. Subsequently, several class-action lawsuits, individual actions, and an SEC investigation were launched against the two mutual funds and their adviser, alleging improper valuation of securities held by each fund.

RESOLUTION

The fund shareholder class action was settled for $8 million, and more than $4 million was spent in legal fees to defend the lawsuits and SEC investigation.

Not the Client's Intention
DESCRIPTION OF EVENT

An investment adviser had discretionary authority over approximately $75 million of the client’s assets. The employee in charge of the account believed that the client intended that the account be used as a hedging fund for the rest of the client’s investments and therefore took a substantial short position in U.S. Treasury securities. As interest rates rose, the account’s value declined by two-thirds in one month. The client sued the adviser and its directors and officers, claiming that he had directed the adviser to invest the account conservatively and had been led to believe that the funds were invested in Treasury bonds, thereby reducing the risk of loss.

RESOLUTION

The claim settled for more than $20 million.

Contract Stipulation Overlooked
DESCRIPTION OF EVENT

An investment adviser managed a large public pension retirement fund. The fund manager sent a letter to the adviser stating that the adviser’s contract was being terminated at the end of the business day and instructing the adviser to cease trading at that time. That day the adviser liquidated the portfolio of thinly traded securities and put approximately 75% of the funds in cash or cash equivalents. The advisory contract contained a stipulation that the adviser must advise the client if more than 25% of the fund’s assets are cash, but the adviser did not advise the fund manager for several days. During that time, the stock portfolio, had it remained intact, would have increased in value by more than $10 million. The fund sued the adviser, alleging failure to adhere to contract provisions.

RESOLUTION

The case settled for over $8 million.

Loss scenarios are hypothetical in nature and for illustrative purposes only. Whether or not or to what extent a particular loss is covered depends on the facts and circumstances of the loss and the terms, conditions, and endorsements of the policy as issued. It is impossible to state in the abstract whether the policy would necessarily provide coverage in any given situation. Above Scenarios provided by Chubb Group of Insurance Companies