Olshan Prevails Before the Second Circuit in Major Short Swing Profit Ruling
Olshan’s litigation group prevailed before the Second Circuit in a significant case involving the application of Section 16’s short swing profit rule to hedge funds. The District Court ruled that the hedge fund was liable under Section 16 for $5 million in short swing profits on the theory that its delegation of investment authority over its portfolio to its registered investment advisor was ineffective. The District Court had cited the overlap in executive personnel between the fund and the advisor as one reason for the ineffectiveness of the delegation as well Second Circuit case law holding internal delegations within a limited partnership ineffective. The Second Circuit vacated the District Court’s ruling and made clear the delegation from the hedge fund to its investment would be effective so long as the fund and advisor were not under the common control of a single person or entity. The fact that the investment manager also served as one of three directors on the hedge fund board, the Second Circuit ruled, was insufficient to render the hedge fund the beneficial owner of securities managed by the advisor. Thomas Fleming argued the appeal and John Moon collaborated with him on the briefs.