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TICKER - Globe Stop? Lawsuit Puts Hedge Fund Administrators In The Spotlight
Hedge fund administrators have long toiled in relative obscurity, providing vital services such as fund accounting and net-asset-value calculations but staying well out of the limelight.
Hedge fund administrators have long toiled in relative obscurity, providing vital services such as fund accounting and net-asset-value calculations but staying well out of the limelight. That looks likely to change following an unprecedented $465 million lawsuit filed last month by Archeus Capital Management, a New York°©based hedge fund firm that shut its doors last fall, against its administrator, GlobeOp Financial Services.
Archeus, which saw its holdings shrink from a high of $3 billion in May 2005 to $700 million before closing in October 2006, accused GlobeOp of "colossal failures" in trade reconciliation and neglecting to provide timely statements to investors. As a result, the lawsuit alleged, the administrator was largely to blame for the investor redemptions that led to the firm's closure. Archeus was the second-biggest hedge fund to cease operations last year, trailing only Amaranth Advisors, which shut down after losing more than $6 billion on natural-gas trades.
The suit, which was filed in the Supreme Court of the State of New York in Manhattan, raised eyebrows. "I was surprised by the terms," said Daniel Celeghin, an associate director at Casey, Quirk & Associates, a Darien, Connecticut°©based consulting firm specializing in advising investment managers. "To say I am suing my administrator because the fund collapsed smacks of a desperate attempt to find blame."
GlobeOp, which is headquartered in New York and London, denied the charges. The company insisted that its contract with Archeus excluded claims for consequential damages related to loss of business.
The suit came at a particularly inopportune time for GlobeOp, which was founded in 2000 by former Long Term Capital Management principal Hans Hufschmid and claims $85 billion in hedge fund assets under administration. The firm was lining up investors for an initial public offering on the London Stock Exchange when Archeus filed its suit, forcing the administrator to suspend the offering. Although GlobeOp threatened to file a counterclaim, the firms quickly reached an out-of-court settlement, enabling the IPO to proceed at the end of July. GlobeOp priced its offering of 20.4 million shares at 230 pence a share, down from a previously indicated 255 pence in late June, before the lawsuit. The shares rose 3.3 percent on the first day of trading to close at 237.5 pence; they eased back to trade at 231 pence in early August.
Terms of the settlement weren't disclosed, which disappointed some observers who hoped the case would clarify administrators' obligations to their clients. But industry experts say the case is bound to prompt hedge funds and their administrators to review -- and clarify -- their relationships.
"This will cause fund administrators to put in better, stronger protections and definitions about what constitutes a breach or cause-for-termination event," says David Cushing, a partner at Crow & Associates, a Princeton, New Jersey°©based law firm that represents both hedge funds and administrators. Others believe the suit is unlikely to be the last of it kind. "While this case is related to specific factual matters, it is the sort of event that simply increases the likelihood that another case like it will be filed," says Ron Geffner, an attorney who oversees the financial services group of law firm Sadis & Goldberg in New York.