Overview
Today Judge Nathan largely granted a series of dismissal motions in an investor lawsuit against Harbinger Capital and certain affiliates. She summarized the case as follows: “At core, Plaintiffs allege that Defendants marketed the Funds as diversified, distressed-debt and credit-driven hedge funds, but in fact used the Funds to take a large ownership interest in LightSquared”—a wireless broadband company—“without adequately disclosing this shift in strategy or its attendant risks.” Judge Nathan dismissed with prejudice all or part of seven of the lawsuit’s nine causes of action, including plaintiffs’ direct claims relating to LightSquared, and all derivative claims brought on behalf of three of the six nominal defendants.
In one notable aspect of the opinion, Judge Nathan granted standing for certain plaintiffs to sue derivatively on behalf of funds in which they did not invest. Judge Nathan relied on the Second Circuit’s reasoning in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., which held that a plaintiff could serve as a class representative for a “series” of MBS securities broader than the specific securities the plaintiff bought, because the “same set of concerns” would be implicated across the series. Judge Nathan extended the NECA rule to derivative cases:
[T]he Court agrees that investors in Fund II may be part of Plaintiffs' putative class under NECA. The fact that Plaintiffs have standing to represent those investors at this stage suggests that they may also represent them insofar as they are authorized to bring derivative claims brought on Fund II's behalf, because the allegations in the [complaint] demonstrate that those derivative claims implicate the "same set of concerns" as Plaintiffs’ direct claims. At least at this stage, whether Plaintiffs themselves invested in the Funds is not a dispositive issue in a putative class action like this. None of the cases that Defendants or Nominal Defendants cite discuss class standing, and they all predate NECA.Brune & Richard represented certain offshore fund nominal defendants, and Judge Nathan dismissed all derivative claims brought on behalf of those funds. Our prior posts regarding actions brought by the SEC against Harbinger Capital and Philip Falcone are here.