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A ‘Wake-Up Call’ for Private Fund Investigators?

A hedge fund sued over negative due diligence reports — and won.

Late last week, hedge fund NuWave Investment Management — a commodity trading advisor (CTA) — got some welcome news. 

A panel of three New Jersey judges upheld a decision to award $40 million in damages over a private research firm’s allegedly defamatory reports on NuWave. 

The long-running court case is likely over, NuWave’s attorney told Institutional Investor, but the consequences for NuWave and the industry broadly continue to play out. 

Friday’s decision “puts to rest the case,” said lawyer John Olsen. “But for the life of the firm, the litigation comes up anytime someone searches for NuWave. It’s something that they’ll be dealing with forever. I hope that it’s a wake-up call for the due diligence firms. They have to go and make sure that sources are not only accurate but reliable.”  

[II Deep Dive: The Ruthless, Secretive, and Sometimes Seedy World of Hedge Fund Private Investigators]

NuWave in 2006 sued BackTrack Reports, which describes itself as “an industry leader in the field of investigative due diligence.” The company prepares and sells background reports about investment management firms to prospective investors, and sold several on NuWave. 

Some of these 2005 and 2006 reports allegedly included defamatory statements, harming the hedge fund’s ability to fundraise and compelling it to pay for public relations and auditing work, court records show. In 2016, a jury awarded NuWave and two of principals nearly $40 million in damages. 

A spokesperson for BackTrack’s parent company Consilio (formerly First Advantage Litigation Consulting) told II, “As a company policy, we do not comment on ongoing legal proceedings.” 

A London-based asset management firm, New Finance, bought two of the reports on NuWave, and its head of operational due diligence called it “the worst he had ever seen,” the Friday opinion stated. The due diligence chief testified during the case, and per the opinion, said “the entire report read like ‘pure venom,’ with ‘every paragraph’ raising a ‘red flag’, and he had no way of knowing what was true and what was false.”    

Yet New Finance did go on to invest with NuWave. Two others who purchased BackTrack’s investigative reports also invested — Moore Capital Management and Mayer & Hoffman Capital Advisers — as the research company noted in its defense. 

BackTrack appealed the damages. NuWave “introduced no competent evidence” of reputational injury, the firm argued in an amended 2017 brief, which asked for a new trial because of a “unfairly prejudicial” errors. 

New Jersey’s judges dismissed these arguments Friday. “None of the defendant’s claims of legal error clearly convince us that the trial resulted in a ‘miscarriage of justice.’”

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