Investors have many choices when deciding where to invest their money. Two of the most common and popular types of publicly traded investment vehicles are mutual funds and hedge funds. Mutual funds are the most common type of managed fixed income or equity investments used by today’s investors. Mutual funds receive money from individuals, companies, non-profits, and other organizations with common investment goals and pool the money together to purchase different assets—such as bonds or stocks—for the entire group. This pooling of money and relying on a manager’s expertise to invest the pooled money allows the members of the pool, who are often investing laymen, to meet investment goals without having to actively manager their own investment. Hedge Funds also take a pooled approach to investing, but are generally distinct from mutual funds because they are limited to accredited and sophisticated investors. Due to the additional requirements needed for an investor to earn a qualified investor status, hedge funds face less regulation than mutual funds. This lessened scrutiny from the SEC allows hedge funds to take a riskier and more leveraged approach to their portfolios.
But in the end, even though mutual funds and hedge funds are different, the SEC still strictly regulates both types of funds. The SEC prohibits the firms managing these funds from making knowingly false or misleading public statements and requires both types of funds to follow strict filing requirements. Violations of the mandatory filing requirements or the dissemination of false statements may make the funds liable to its investors for losses stemming from these false filings and statements—just as publicly traded companies in other industries may be held liable for their knowingly false statements. Common examples of misrepresentations in the context of funds include: misrepresenting the fund’s investment strategy, misrepresenting the capital structure of the fund or the assets under management, and falsified performance metrics—often presented through client presentations, marketing materials, SEC filings, or other communications. It is important to note that the above list is not exhaustive and that a fund member may have a claim against the fund if the firm managing the fund knowingly or recklessly disseminated any information to the pubic that was both false and of the type likely to affect an investor’s decision to enter, exit, or maintain their position in the fund. Depending on the nature of the misrepresentation investors in these funds may be able to recoup their losses stemming from their reliance on a fund’s misrepresentations.
Unfortunately, due to the nature of this harm and the type of investors that make up these funds (especially mutual funds), it is often difficult to figure out when an incorrectly-made statement or filing rises to the level of securities fraud. Seeking the opinion of a seasoned securities lawyer can help interpret and navigate these often confusing waters. If you believe a fund has issued false or misleading statements, please contact Glancy Prongay & Murray.