Tuesday, June 21, 2011
Court Permits Fund Investors to State Claim Based on Misrepresentations Inducing Them Not to Redeem Investments
A federal district court in Colorado, applying the Colorado Securities Act, recently held that limited partners stated a claim against a fund's administrator and its lender, based on their allegations that they made decisions not to redeem their investments, but to continue to reinvest their returns, because of defendants' misrepresentations about the fund's financial condition. Agile Safety Variable Fund, L.P. v. Sky Bell, LP (D. Colo. May 31, 2011). Ultimately, the fund turned out to be a Ponzi scheme.
The court did not view this as a pure "holder" case, because the plaintiffs increased their investment in the fund by reinvesting their returns. In addition, the court noted that "the policy concerns underlying the holder doctrine" were inapplicable in this case, for two reasons. First, unlike owners of common stock, plaintiffs could not trade in the securities in an open market, but could only redeem their investments directly with the fund. Second, there were direct communications between the investors and the defendants. Both these factors convinced the court that plaintiffs' theory was not too speculative to permit recovery. Accordingly, the court held that plaintiffs were entitled to present their evidence to a jury.