Manager and Service Provider Liability – Where are we now?

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

2. 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

3. 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

4. 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

5. 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

6. 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?

7. 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

8. 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?

9. 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

10. 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

11. 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

12. 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

13. Ingrid Pierce Partner and Head of the Cayman Investment Funds Team T+1 345 814 4667 ] E ingrid.pierce@walkersglobal.com Walker House 87 Mary Street, George Town Grand Cayman KY1-9001 Cayman Islands T +1 345 949 0100 E info@walkersglobal.com