On Tuesday, Judge Gardephe rejected an attempt by Reserve Management Company (RMCI), the investment adviser to the Reserve Primary Fund – the money market fund that “broke the buck” four years ago after Lehman’s bankruptcy – to send its malpractice action against Wilkie Farr & Gallagher LLP back to state court. The Court concluded that the exercise of federal jurisdiction over the action was appropriate because of the “strong federal interest in the federal securities law issues raised in RMCI’s malpractice complaint.” As we reported previously, in defending the SEC’s securities fraud action against them, RMCI and two of its principals have claimed that they relied on Wilkie’s advice in communicating with the public on September 15 and 16, 2008 and considering a credit support agreement that would preserve the Primary Fund’s $1.00 NAV. RMCI’s malpractice action against Wilkie asserts that Wilkie provided incompetent advice to RMCI that led to it being sued by the SEC and private parties. It also alleges that Wilkie’s simultaneous representation of RMCI and the Reserve Primary Fund presented a conflict of interest that the firm never disclosed to RMCI and that has caused significant prejudice to RMCI. RMCI claims that Wilkie failed to advise RMCI properly about including an indemnification and advancement of attorney fees provision in the management agreement between RMCI and the Reserve Primary Fund.
Continue Reading Judge Gardephe Won’t Send Reserve Fund Malpractice Suit Back to State Court

Trial in the SEC’s securities fraud action against several entities and individuals who managed the Reserve Primary Fund – the money market fund that “broke the buck” four years ago after Lehman Brothers announced its bankruptcy – is slated to begin on October 1, 2012. Earlier this week, in anticipation of the looming trial date, Judge Paul Gardephe issued a series of evidentiary rulings. They were a mixed bag for the parties. On the one hand, Judge Gardephe rejected the SEC’s attempt to prevent the Reserve Fund defendants from pursuing an advice of counsel defense. On the other, he ruled that two of defendants’ expert witnesses could not testify at trial. These rulings could have a substantial effect on the trial or on any settlement negotiations between the parties.
Continue Reading Judge Gardephe Allows Reserve Fund Defendants to Proceed with Advice of Counsel Defense

The SEC recently asked Judge Rakoff to compel Citigroup Global Markets, Inc. to produce attorney-client privileged communications concerning a CDO offering. It did so because, in defense to an SEC enforcement action, a banker asserted that he reasonably relied on Citigroup’s internal processes – including its attorneys – to handle the disclosure of information that the SEC claims was misleadingly omitted from the offering documents. In a letter filed Thursday, the parties told the court that they had resolved the issue, but the terms were not disclosed. The parties’ resolution of the motion leaves open an interesting issue. In the underlying case, the SEC charged a former Citigroup employee, Brian Stoker, with failing to disclose material facts in a CDO’s offering circular and pitch book. The SEC alleges that these omissions included Citigroup’s influence over the selection of assets for the CDO and its retention of a proprietary short position in the assets it helped to select. Stoker answered that he “reasonably relied on Citigroup’s institutional processes to ensure adequate review – both legal and managerial – and disclosure of material information, and he cannot be held liable for alleged failings of those processes.”
Continue Reading SEC Resolves Motion to Compel Attorney-Client Communications Where Defendant Has Asserted Reasonable Reliance Defense