Asset Protection for Money Managers, Investment Advisors and Financial Professionals

Asset Protection for Money Managers, Investment Advisors and Financial Professionals

(Or, We hate to say “I told you so” #2, but look here)

by Asher Rubinstein, Esq.

New York’s attorney general has sued Ivy Asset Management, a hedge fund manager, and two of its former executives, its CEO and its CIO, claiming that they knew years ago that Bernard Madoff was a fraud, but did not disclose that knowledge to the fund’s investors.

Attorney general suits against hedge funds are not new.  Lawsuits related to Madoff’s fraud are not new.  But recently, we have seen more and more lawsuits filed against fund managers and investment advisors personally.  In other words, the plaintiffs not only target the funds or financial institutions, but the people who make the investment decisions, naming these people personally and putting their personal assets at risk.

We wrote about this development just last week; please click here.

In that article, we discuss why indemnification is often of little comfort.  We outlined domestic and international asset protection strategies that will effectively protect personal assets from these kinds of claims.

Recent events make clear the need for asset protection by financial professionals.  Following the charges filed last month by the Securities and Exchange Commission against Goldman Sachs, there is a real possibility that individual Goldman Sachs executives may face government investigation and charges.  Investors in Goldman products may also file civil charges, in addition to charges filed by the government.  In today’s news, Morgan Stanley is being investigated for wrongdoing in connection with investment activities.  Actions against Morgan Stanley executives are a possibility also.  The need for asset protection by financial professionals is continually reinforced in today’s climate.

Contact us for additional information.

Asset Protection for Financial Professionals, Hedge Fund Managers and Investment Advisors

Asset Protection for Financial Professionals, Hedge Fund Managers and Investment Advisors

Traditionally, professionals in certain high-liability professions were most interested in asset protection.  Examples include doctors facing the threat of medical malpractice lawsuits, and landlords and real estate developers  facing lawsuits from purchasers or tenants of the real estate.

Lately, we’ve been seeing the emergence of a new group: investment advisors, hedge fund managers and other financial professionals.  This group is faced with an increase in lawsuits brought by litigious investors against their financial advisors and those charged with making investment decisions.  As investors seek to blame others for investment losses, plaintiffs are now suing fund managers personally, in addition to suing the fund itself.  In the past, it was routine to sue the fund or financial institution; naming the fund manager or investment advisor personally is something new, but something that we are seeing in increasing numbers.

In addition, government investigation and prosecution of financial firms, including the recent charges against previously-untouchable Goldman Sachs, add a further challenge for investment advisors and financial professionals.  Individual professionals can be investigated and charged, in addition to the firm or fund itself.  A finding of wrongdoing, or criminal charges, could form the basis of a civil suit by investors against the investment advisor or money manager.

Domestic asset protection (for example, a family limited partnership, or FLP) will, if properly established and maintained, be 100% effective against all future claims.  Such asset protection should discourage future lawsuits and give defendants significant leverage to force favorable settlements.  One caveat: it is imperative that financial professionals protect themselves before the commencement of a lawsuit by a disgruntled investor.

Domestic asset protection via FLP’s is extremely effective against future claimants, but may not be as effective with respect to pre-existing claimants.  In such cases, a financial professional may not be completely protected by domestic asset protection and may have to utilize international asset protection strategies.  International asset protection strategies are effective primarily because they involve the physical transfer of an asset to a safe and secure foreign locale where the asset is beyond the jurisdiction of U.S. courts.  Money, for example, may be wired offshore in order to be completely protected from disgruntled investors.

While in the past, hedge fund managers and investment advisors could take comfort in the indemnification offered by the their funds or investment houses, these days, adequate indemnification is far from certain.  For one thing, indemnification would not occur in case of negligence or activity determined to run afoul of law, or even activity deemed to be contrary to internal fund or investment house policy.  Of greater importance, indemnification is “after-the-fact”; it seeks fund reimbursement after you have already lost your assets.  Proper asset protection is pre-emptive; it is designed to discourage lawsuits in the first place and to protect your assets from future claimants.  It eliminates the need for indemnification or, at the least, significantly reduces the amount of indemnification needed.

Proper asset protection strategies offer financial professionals piece of mind and provide the protection their hard-earned assets need to withstand the inevitable attacks by investors looking to blame someone else for their investment losses.

Contact us.



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