Pine Street Associates vs. Southridge Partners decision termed “a big win for hedge fund investors”
NEW YORK, April 29, 2013 – Becker & Poliakoff just obtained an appellate reversal of an important action between two hedge fund titans. Pine Street Associates, a hedge fund that is affiliated with Omega Advisors and managed by Lee Cooperman, a high profile investor, retained Becker & Poliakoff to appeal an unfavorable ruling won by Southridge Partners LLP, a hedge fund controlled by Steven Hicks, the well-known and controversial fund manager who is currently being sued (along with Southridge) by the SEC for fraud based on an alleged overvaluing of securities: http://www.nycourts.gov/reporter/3dseries/2013/2013_02854.htm
The controversy arose out of an investment in 2005 by Pine Street in a Southridge fund. In October, 2008 Pine Street sought to redeem its remaining investment in the fund, which Southridge valued at approximately $8,000,000. Southridge delayed redemption without explanation and Pine Street was forced to commence arbitration to obtain payment.
In the arbitration, Southridge argued that under the fund limited partnership agreement, it could delay redemptions at its sole discretion and redeem in kind (i.e. in securities) rather than in cash, again at its own discretion. In December 2010, the arbitrator concluded that those powers must be exercised in good faith, and Southridge had not demonstrated any credible reason for the delay. Accordingly, it ordered Southridge to redeem the full value of the account (which, after one small payment, was about $7.9 million) in two tranches, 40% in cash in 30 days, and the balance in cash or kind in 90 days.
Southridge tendered a check for $3.1 million within the 30 days. But when the second tranche came due it tendered a variety of thinly traded, virtually worthless securities and claimed that the tender satisfied the “in kind” requirement. Pine Street moved in state court to confirm the award and compel Southridge to deliver securities valued at the original redemption price. Southridge opposed and argued that “in kind” meant it only had to deliver securities that had been allocated to Pine Street’s account prior to the redemption without regard to the value of the securities. Southridge claimed that as long as it gave Pine Street 60% of what remained in the account, it satisfied the award. The lower court agreed and Pine Street appealed.
The Appellate Division reversed. The key issue on the appeal was the meaning of “in kind,” a term that surprisingly was not subject to a previous judicial interpretation in the hedge fund/limited partnership context, even though the term is frequently used in redemption provisions in such agreements.
The court held that that when redemption is in kind, securities equivalent in dollar value to the redemption amount must be delivered. The result – Southridge must provide Pine Street with securities fairly valued at 60% of $7.9 million and not whatever securities happened to remain in Pine Street’s securities account at the time of redemption. Since there was a dispute as to the actual value at the time of redemption, the appellate court directed an evidentiary hearing on the issue.
The Appellate Division also held that the court has the power to interpret an arbitrator’s award, that it will do so in the light most favorable to the prevailing party and that it cannot remand to the arbitrator for clarification of the award, the latter part of which was a novel ruling for a New York appellate court.
“This decision is a big win for hedge fund investors,” commented Becker & Poliakoff attorney Lance Gotthoffer, who represented Pine Street Associates. “Most funds have the option of paying redemptions in securities rather than cash and today’s decision makes it clear that the option cannot be used to deprive investors of the value of their account.
“The decision also fills in some significant gaps in New York law on arbitration by providing finality on judicially confirmed awards,” Gotthoffer added. “Once the award is confirmed, the arbitration is over and it is up to the court to interpret the award without further ‘clarification’ from the arbitrators. It removes doubt from an area of ever increasing importance given the exponential increase of arbitration in all walks of commercial life.”