Top Best Practices for Avoiding Litigation

Matthew Larrabee outlines some of the best practices firms can employ in an attempt to avoid litigation. While it may be impossible to entirely avoid lawsuits, implementing these practices may result in better outcomes if a firm does get sued, he says. Trends in fund litigation and insurance coverage are the subject of a new book that Larrabee co-authored with David Kotler, also a partner at Dechert, and Eric Barber and Timothy Burns, partners at Perkins Coie.

Ignites: “We’re talking a bit about some of the recent trends in fund litigation. Matt has just written a book about fund litigation and insurance coverage. For firms that are attempting to not be sued at all — which, obviously, it happens — what are some of the best practices that they can use to at least try to avoid litigation?”

Larrabee: “I speak to clients all the time. I’ve probably made, in the last 12 years, 20 presentations on these topics. This is the No. 1 question that gets asked by the industry: What can we do?

“The first things we talk about are identifying the key issues that have been the subject matters of all these proceedings. Disclosure, No. 1 on the list; some valuation issues; obviously, fee issues; and paying attention to how you have good processes for those issues, and actually more good governance and understanding the content.

“The No. 1 advice I give people is understand what you’re selling. Understand what your product is and understand what your product is today. One of the big lessons of the past was portfolio management changes over time. Portfolio drift — common word. What we had in our prospectus in 2006 or ‘07 or ‘08 or ‘09 may have been precisely accurate, but we may be doing something different today. If we’re doing something different today and our disclosures are the same, there’s a question about, ‘Should we revisit the disclosures and update them?’

“There are a number of issues like that where you’re really just talking about good governance, staying current, know what you’re selling, know what your formal disclosures are. Know what your informal disclosures are.

“How funds are marketed — very, very important. The marketing process is often not as tightly managed or reviewed as a prospectus. A prospectus is a very serious legal document that’s filed with the SEC and everybody attaches a lot of importance to it, as they should. “Marketing documents can be different. They also can be a very important source of focus from class action plaintiffs or the SEC. In a class action, oftentimes the No. 1 document we get asked for is not the prospectus. People already have the prospectus. They’ve read it. That’s what they filed the complaint about. The No. 1 thing they want to look at are what are the marketing documents. How are you describing the fund?”