Thursday, August 19, 2010

Delaware Supreme Court Orders Defunct Hedge Fund to Provide Names and Addresses of Limited Partners to Fund Investor

The Delaware Supreme Court has ruled that a limited partner of a defunct hedge fund had the right to obtain a list of the names and addresses of its fellow limited partners and that federal privacy regulations did not preempt this right. Thus, the en banc Court affirmed a Chancery Court order to the hedge fund to produce the list. (Parkcentral Global, L.P. v. Brown Investment Management, L.P., Del Supreme Court, CA No. 5248, August 12, 2010).

By November 2008, the hedge fund had suffered large losses that wiped out investors’ capital. As a result, this limited partner lost its entire investment. The hedge fund is no longer in any active business and has no business plan. The limited partner sought the information in an effort to contact other limited partners in order to investigate claims of the fund general partner’s mismanagement or breaches of fiduciary duty.

The Court noted that the partnership agreement expressly grants limited partners the right to access a list of the names and addresses of each partner. The limited partner complied with all the procedural requirements which entitled it to the list of names and addresses, said the Court, and the general partner may not eliminate that right through unilaterally issued privacy notices.

The full Court also rejected the fund’s assertion that federal regulations pre-empt Delaware law and prohibit disclosure of the shareholder list. The Gramm-Leach-Bliley Act of 1999 provides privacy protections for customers of financial institutions. Pursuant to the Act, the SEC, CFTC, and FTC adopted rules designed to protect individuals’ privacy interests. Under these privacy regulations, a financial institution may not disclose any nonpublic personal information about a consumer to a non-affiliated third party unless the individual has been provided notice and the opportunity to opt out of the disclosure.

The privacy regulations do not pre-empt Delaware law in this instance, noted the Court, nor do the federal statute or regulations apply to the partner list. The federal agencies did not express a clear intent to pre-empt state law. Rather, to comply with state law, they included an exception to the notice and opt out requirements when a financial institution discloses non-public personal information. For example, the FTC’s regulations provide an exception to comply with federal, state, or local laws. Disclosure of the list of the limited partners’ names and addresses to another limited partners falls within that exception, said the Supreme Court, because the Delaware Code requires it.

Finally, the Court rejected the hedge fund’s contention that the partnership agreement allowed it to keep the list of names and addresses confidential because it believed in good faith that disclosure would damage the fund. The Court found that the fund did not demonstrate that it had a good faith belief that providing a list of names and addresses would harm the fund. In that context, the Court noted that the hedge fund does not actively conduct business and thus has no business to damage. Disclosure of the names and addresses of the partners may harm the general partner’s reputation and it may limit certain individuals’ ability to gain investors in future funds, said the Court, but it will not damage the fund.