Feeder Funds Get A Boost From Second Circuit Decision

An investment advisor with respect to investments in hedge funds cannot be sued for securities fraud under the Private Securities Litigation Reform Act for recommending an investment in the Bayou funds after it was discovered that it was a Ponzi scheme, according to the ruling issued Tuesday by the U.S. Court of Appeals for the Second Circuit in South Cherry Street, LLC v. Hennessee Group LLC. 

The circuit court, in affirming the district court’s decision to dismiss the securities fraud claim, found that the complaint did not allege facts sufficient to create “a strong inference of scienter” – either fraudulent intent or conscious recklessness – and that the inferences advocated by the plaintiff were “not as compelling as an inference of negligence.”

 
We believe that the circuit court’s ruling will encourage feeder funds in the Madoff Ponzi scheme that their exposure to investors may be limited. Do you agree? Let us know.
 
The decision is available at http://www.ca2.uscourts.gov/decisions/isysquery/4784ba8d-d578-4aaf-b312-072e59d2a3ec/2/doc/07-3658-cv_opn.pdf#xml=http://www.ca2.uscourts.gov/decisions/isysquery/4784ba8d-d578-4aaf-b312-072e59d2a3ec/2/hilite/.