Will there be increased litigation in the coming months/year related to the events of 2008? In general do you expect to see more litigation relating to hedge funds over the medium to longer term? What do you think will be the main issues/areas of litigation?

Robert Briant in the British Virgin Islands office of Conyers Dill & Pearman believes most of the funds in crisis have already been identified and any litigation has either commenced or is imminent. “The litigation surrounding the Madoff feeder funds, as well as the other fraudulent schemes uncovered as a result of the financial crisis, will continue for years to come,” he cautions.

Both Tania Dons and Richard Finlay in the Cayman Islands office of the firm do not expect any dramatic increase in the level of fund-related litigation in that jurisdiction over the coming year or longer term. While there has not been as much litigation in Cayman as people may have expected, their view is that this is in large part due to the quality of legal services funds have traditionally received in Cayman when establishing their funds. They also think funds, managers and their counsel have managed to manoeuvre their way through liquidity issues and restructure without alienating investors and without the need to resort to litigation.

Brian McDermott and Siobhán Moloney in the Dublin office of A&L Goodbody paint a different picture for funds in Ireland. They believe as the fund industry in Ireland continues to grow, there will be a growing need to resolve commercial disputes. Funds domiciled in Ireland, their investment managers and service providers have consulted A&L Goodbody recently, reveal the pair, on a range of disputes, including breach of contract and/or negligence claims, allegations of mispricing, breaches of investment restrictions, the interpretation of fund documentation including the adequacy of disclosure on strategy, regulatory investigations, claims against fund directors and the extent of due diligence on, and supervision of, any investment manager.

In London the mood is similar. Sonya Van de Graaff at Brown Rudnick also expects to see much more litigation. “Hedge funds will need to be prepared actively to protect their investments,” she says.

Hedge funds have and will continue to face threats from other investors, such as in structured finance transactions. Investors in other tranches will often want a different outcome to a situation than investors in another tranche. Also the government, through the privatisation of investments, can throw a spanner in the works on any investment, she cautions.

Ingrid Pierce at Walkers in the Cayman Islands is also braced for increased litigation over the coming months. “Funds are contemplating restructuring plans and in some cases are still dealing with liquidity problems. The main areas are principally related to the treatment of investors, valuation issues and whether funds are operating within the fund documents,” she says.

Gray Smith at Appleby in Cayman agrees. “We have seen a huge amount of litigation, actual and threatened, and the drafting of documents has not always helped. It is probably peaking now, which means another two years of activity for most litigation departments due to the length of the process. Most of it boils down to investors not getting their cash and that will always be the key issue,” he concludes.

Also in Cayman, Matthew Crawford at Maples and Calder is expecting litigation activity relating to hedge funds to increase over the next two years. “Based on our experience of activity in 2009, the main issues are likely to be how funds respond to continued liquidity problems, how they deal with counterparty risk and the performance of their service providers in times of crisis,” he says.

Ogier’s Simon Schilder in the British Virgin Islands believes litigation is likely to come in two stages. The first stage will be actions bought by disgruntled investors challenging the imposition of suspensions and gates and/or the refusal of funds to provide information.

“We are seeing this litigation coming through the courts at the moment and this is posing interesting and important questions as to the construction and meaning of certain provisions of fund documents, which were previously market standard,” notes Schilder.

The second stage is likely to be actions brought by funds, possibly through the liquidator of the fund, against various service providers for things like breach of mandate claims and other issues, says Schilder.

“There will almost certainly be increased litigation in the coming months in relation to the events of 2008,” predicts John Langan at Withers in London. He thinks the most common areas of litigation are likely to be claims from investors who think they have been misled about the value of assets; inaccurate industry-specific data which influenced their decision to invest and skewed the rates of return; and allegations that a fund manager misled them about exposure to the mortgage-backed securities market or to another type of investment which has failed or underperformed.

“In addition, material mis-statements in the offering documents may give rise to claims against the fund manager,” forecasts Langan.

“It may also be possible to hold investment banks that securitised the mortgages or other receivables at least partly responsible, in the case of a major collapse of the market, for failure to disclose material facts about the credit quality of the mortgages or assets receivable,” he notes.

Other possible actions by the liquidator on behalf of the stakeholders against directors may include breach of fiduciary duties, fraudulent preference, trading while insolvent, misfeasance, fraud and theft. “Often the actions of the directors, managers and functionaries will give rise to tracing claims against third parties for recovery of money belonging to the fund which has been wrongfully paid away,” explains Langan.

In the much more litigious US courts, Mitch Nichter at legal firm Paul Hastings in New York is convinced there will be more court action. “Litigation and regulatory enforcement actions in this area have increased and we likely will see more of the same in the immediate and longer term. Once markets settle down and resume their advancement, we expect to see fewer disputes and less litigation,” he expects.

Nora Bullock and Simon Atiyah at Lovells believe there will be an ongoing trend towards more disputes and more litigation in the hedge fund area. These cases will be driven by greater regulation providing investors with more avenues of legal recourse. Because of higher levels of due diligence and more rigorous disclosure requirements, managers will have less “wriggle room” when things go wrong, they say.

At Kaye Scholer, partner Simon Firth thinks most future lawsuits will be fought over breaches of investment policy and alleged favoured treatment of some investors over others. “For the future as due diligence becomes more precise and more representations are required of managers, their operating and compliance procedures will need to be enhanced and tightened. Failure to follow those procedures, or misrepresentation given to investors, will be more likely to be punished by seeking legal remedy,” he forecasts.

In Guernsey at Ogier, Frances Watson also expects an increase in litigation. “Themes include termination of investment management agreements, loss of key persons, shareholder activism at general meetings and queries as to the robustness/disclosure level of fund documentation by investors,” says Watson.

“The precision with which certain clauses within documentation was drafted has been under considerable scrutiny, which impacts upon future documentation,” points out Watson.

“Considerable thought is currently being given as to how to balance requirements for liquidity with protection of value for ongoing investors, in a way which would be attractive to all investors. This also is starting to impact upon documentation,” she adds.