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Reason Foundation

Court Rules Investors Responsible For Own Actions

Anthony Randazzo
July 24, 2009, 4:35pm

The U.S. 2nd Circuit Court of Appeals handed down an encouraging ruling last week regarding liability for investment advisors. McGuireWoods news service reports:

In a highly anticipated decision last week, the U.S. Court of Appeals for the 2nd Circuit unanimously affirmed the Southern District of New York's dismissal of South Cherry, LLC's breach of contract and securities fraud claims against the investment advisor Hennessee Group LLC for losses sustained as a result of Hennessee's recommendation to invest in the Bayou Hedge Fund Group.

South Cherry Street, LLC, a XXXXXX, had filed suit against Hennessee after losing their shirt when it was revealed that Bayou Hedge Fund was a Ponzi scheme. The South Cherry claim was that Hennessee failed to conduct proper due diligence when researching Bayou and suggesting it as a good investment opportunity. However, the court sided with Hennessee on their arguments that, first, South Cherry didn't have the law on their side given the "oral contract" that was alleged, and second, South Cherry never indicated how much risk it was willing to take when considering suggested places to invest. The court's opinon finds that the South Cherry claims are without merit, implausible, and that it should bear the responsibility for making the ultimate decision to invest.

Now, Hennessee is at fault here for giving bad advice, but they will be punished in the market place by having less people trust their advise (if that is the appropriate response). There is no cause for Hennessee to bear responsibility for South Cherry's investment. This decision will likely have important relevance to the investor claims related to the Bernie Madoff scandal.

Read a summary of the decision here and the full court ruling here (PDF).


Anthony Randazzo is Director of Economic Research


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