Should Investors and Private Equity Funds Doing Business in New York Be Alarmed At Justice Barry Ostrager’s Opinion?
NEW YORK, NY / ACCESSWIRE / February 22, 2021 / According to Jeremy Kim, General Counsel with ACP Investment Group, Justice Barry S. Ostrager’s opinion on February 4, 2021 in New York Attorney General v. Allen, ACP et al. finding that defendants committed fraudulent activity, will provide even more powers to the New York Attorney General by expanding the New York Martin Act and allow investors and their estates to bring litigation in the State of New York decades after their initial investment.
“The Court’s decision is both wrong on the facts and under the law. Unless immediately reversed, this decision will have significant adverse implications on New York’s finance industry.” States Jeremy Kim, General Counsel with ACP Investment Group, LLC. Mr. Kim states that “investors will unwittingly be dragged into unnecessary and frivolous litigation and may have their capital accounts frozen for years by the NY AG as occurred in this case. Mr. Kim went on to further state “this ruling may also have far reaching negative impact on financial firms and investment houses for private equity funds, mutual funds and hedge funds, and even brokers who do investment business in New York with clients who hold investment positions for extended periods of time will be affected. This ruling gives the New York finance industry little to no protection from the statute of limitations under New York’s Martin.”
“Legal experts have vocalized concerns that the Martin Act is an overreach of the state’s authority. Without needing to prove malicious intent, the NY AG has the ability to prosecute a company through an almost limitless scope, threatening the balance between state and federal authority.” [Citation - https://eidclimate.org/the-martin-act-explained ]
Columbia Law School professor Philip Hamburger has written that the Martin Act invites “profoundly dangerous constitutional violations,” while his colleague Merritt Fox has criticized how the NY AG has used the Martin Act to bully companies.
Critics of the Martin Act also say that the Act can be - and has been - used by the state to target and damage industries that New York officials simply don’t like (for example, gambling ), whether or not wrongdoing took place.
“The NYAG’s case should have failed on both the law and the facts”, according to Kim.
As a legal matter, this case involved alleged misrepresentations and omissions in offering documents for a 2004 vintage private equity partnership, ACP X, LP (drafted by outside legal counsel), and therefore under New York’s statute of limitations presented time-barred Martin Act and related claims.
“Beyond this, the NY AG’s Martin Act allegations were substantively deficient because the private equity fund documents explicitly permitted investments into affiliated entities - the alleged fraud here. Investments in affiliates are authorized by a variety of private equity funds and regulated by the SEC under exemptions to the Investment Company Act of 1940.” said Kim. [please see https://www.sec.gov/rules/final/ic-25888.htm ]
To clarify, the Martin Act requires a material misrepresentation or omission of fact that occurs around the time a statement is made to induce or promote the issuance, distribution, exchange, sale, negotiation or purchase of securities o cause the purchase or sale of a security. This is where fraudulent conduct can occur, as opposed to a statement made more than a decade later rendering the statement misleading in hindsight - which is not fraud.
In this case, the statute of limitations period ran from the date that a fraudulent statement was allegedly made, which in this case is 2004-2006 when statements were made in offering documents, and not when conduct occurred later that allegedly rendered a statement false - in hindsight.
Justice Ostrager also posed the following question to the NY AG: if a securities offering is made in 1950, and then 20 years later there is a violation of the offering documents, would there be a timely and viable Martin Act claim ? Astoundingly, the NYAG counsel responded that there would still be a viable Martin Act claim.
“This plainly violates traditional notions of due process since there would be no repose, as under such as theory, the estate of investors would be able to bring lawsuits centuries after the deceased investors made their initial investments. This case also failed on the facts. The contractual documents explicitly permitted all of the conduct that the NYAG alleged was wrongful, including distributions of carried interest to the general partner based on amendments to the limited partnership agreement that were approved by the requisite majority of the fund’s limited partners.” said Kim.
Defendant’s presented six limited partner witnesses who testified that they understood the fund’s contractual agreement gave the general partner wide latitude, allowed investments in affiliates, payments of carried interest, and permitted the conduct the NY AG alleged was wrongful.
The NYAG presented five limited partner witnesses, and these witnesses did not rebut the Defendant’s limited partner witnesses, they simply believed the general partner deviated from the offering documents or made bad investments, which is not wrongful or even unusual conduct for a long-term private equity partnership that had to navigate the 2008-2009 financial crisis.
Defendant’s presented 5 expert witnesses and the NY AG presented 2 expert witnesses, none of which found that fraud had occurred by the general partner of ACP X, LP.
Given the NY AG’s responses and the facts stated above, it appears that the NY AG’s case was an outrageous abuse of prosecutorial powers against the private equity fund industry. Just as shocking was Justice Barry Ostrager’s illogical finding that the Defendants committed fraud.
#Privateequity, #NYPPEX, #LaurenceAllen, #NewYorkAttorneyGeneral
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