Overview
On Tuesday, Judge Gardephe rejected an attempt by Reserve Management Company (RMCI), the investment adviser to the Reserve Primary Fund – the money market fund that “broke the buck” four years ago after Lehman’s bankruptcy – to send its malpractice action against Wilkie Farr & Gallagher LLP back to state court. The Court concluded that the exercise of federal jurisdiction over the action was appropriate because of the “strong federal interest in the federal securities law issues raised in RMCI’s malpractice complaint.” As we reported previously, in defending the SEC’s securities fraud action against them, RMCI and two of its principals have claimed that they relied on Wilkie’s advice in communicating with the public on September 15 and 16, 2008 and considering a credit support agreement that would preserve the Primary Fund’s $1.00 NAV. RMCI’s malpractice action against Wilkie asserts that Wilkie provided incompetent advice to RMCI that led to it being sued by the SEC and private parties. It also alleges that Wilkie’s simultaneous representation of RMCI and the Reserve Primary Fund presented a conflict of interest that the firm never disclosed to RMCI and that has caused significant prejudice to RMCI. RMCI claims that Wilkie failed to advise RMCI properly about including an indemnification and advancement of attorney fees provision in the management agreement between RMCI and the Reserve Primary Fund.
After RMCI filed its malpractice suit in state court, Wilkie removed it to federal court and sought to keep it there, arguing that RMCI’s theories of liability present substantial questions under the federal securities laws over which federal courts have exclusive jurisdiction. Wilkie asserted that for RMCI to prevail under either theory of liability, it would have to prove that it did not violate the federal securities laws. Judge Gardephe agreed. He concluded that for RMCI to recover against Wilkie, it would have to show that it did not violate the federal securities laws and thus would have been entitled to indemnification under the provision RMCI claims Wilkie should have negotiated, or that it committed no federal securities law violation that could have been the basis of an SEC enforcement action. Judge Gardephe also found that whether RMCI violated the federal securities laws “presents a number of hotly disputed legal issues, including what misstatements and omissions may form the basis for a claim under Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act of 1933.” Judge Gardephe decided to keep the suit in federal court "given the comprehensive federal securities regime, and the fact that Congress has granted federal courts exclusive jurisdiction over federal securities law actions.”