vikingThe buzz of Wall Street today is that Brian Hunter, a 32-year-old star natural gas trader with Connecticut hedge fund Amaranth Advisers, lost roughly $5 billion last week. So let’s ask the question: Where were the lawyers?

Let’s face it, the threshold issue is a business one: Were there sufficient risk-management controls in place at Amaranth to prevent this from happening? Nick Maounis, Amaranth’s founder and chief executive, told the WSJ in August that more than a dozen members of his risk-management team served as a check on his ace trader. “What Brian is really, really good at is taking controlled and measured risk,” Maounis said.


Cases of bad bets by hedgies are rarely the stuff of lawsuits. Hedge fund investors are supposed to be sophisticated about what they’re getting into. And fund offering documents normally give wide berth to portfolio managers in terms of what they can trade and how much leverage they can take on. This papering innoculates hedge funds from liability, and it’s often very difficult — barring out-and-out fraud (see, e.g., Bayou Group, which generated numerous lawsuits) — for angry investors to have any legal redress.

But that might not stop lawyers for the fund’s angry investors at least from asking: Were the risks adequately disclosed in the offering documents? Did Amaranth satisfy its fiduciary obligations to inform its investors about fund performance? And what are the legalities surrounding Amaranth’s lockup provisions, which could prevent angry investors from withdrawing their assets?

The Law Blog reached an Amaranth spokeman, who declined to comment.

Amaranth’s pretty well lawyered. The fund has a handful of in-house attorneys. Co-GCs are Karl Wachter, who spent four years as an associate at Cleary Gottlieb Steen & Hamilton in New York and Joel Harari, who previously was a lawyer at $12 billion Chicago hedge fund Citadel. It’s outside counsel is Sidley Austin’s David Sawyier, one of the country’s leading hedge fund lawyers (and a former Olympic rower).

Wachter has been an outspoken critic of the SEC’s so-called general solicitation rules, which prohibit hedge funds from advertising to the general public. Said Wachter in an interview with Reuters earlier this year: “We’d like to have some influence over how our story is told, but restrictions prevent us from talking.”

Amaranth’s blowup also illustrates the risk in going in-house to work at a hedge fund. The last several years have seen lawyers at the nation’s top law firms moving in-house to hedge funds, a trend something akin to the migration of corporate attorneys to dot-coms in the late 1990s. Most hedge funds traditionally relied on outside counsel for most legal work, but as they’ve expanded they’ve added more lawyers in-house. On the surface, the decision for hedge-fund lawyers seems like a no-brainer: fewer hours, better pay. But, as the old adage goes, with more reward comes greater risk.