Personal liability for investment officers over fund losses

NEW YORK – A decision by the New York Appellate Court could ease the way for legal actions against investment advisers, according to George Mazin, a partner in the financial services group of law firm Dechert in New York. The first department of the NY Appellate Division decided in June that corporate officers of an investment adviser can be personally liable for losses suffered by a fund they advise, for breach of fiduciary duty, even if such a claim lies outside the fiduciary agreement.

"The New York Court's decision increases the potential for tort claims for fiduciary breach outside the advisory contract. Often, investment management agreements have sweeping limitations on the duties of the manager under the contract, but the court now says that contractual limitations do not preclude tort claims. An investment manager is a fiduciary and owes fiduciary duties to its client beyond its express obligations under the contract. "But the question remains to what extent can an investment manager protect itself by limiting tort claims based on a breach of fiduciary duty through waivers or limitations in the contract?" asks Marzin.

The decision means a fiduciary duty is not only discharged by fulfilling a contract, but a fiduciary relationship can develop in the parties' ongoing conduct, and could require performance of more than just contractual duties. It also makes breach of fiduciary duty a tort, rather than just breach of contract, and officers can be held personally liable for tortuous behaviour on the job.