When a Fund is Sued : An Independent Director’s Guide to Fund Litigation - Part 1

This article explains what independent fund directors should know about fund litigation. While independent directors were named defendants in prior lawsuits - for example, § 36(b) excessive fee lawsuits - the scope of litigation that followed 2003 was without precedent both in terms of the number of lawsuits and the number of those suits naming directors as defendants. The number of lawsuits and the scope of litigation reflect the increased scrutiny to which the conduct of fund directors is subject. This article first describes the most common types of claims against funds and the roles that independent directors typically play when these claims are brought by a plaintiff. It then describes the differences between “direct actions” against a fund and derivative lawsuits brought on behalf of a fund, including the critical role independent directors have to play with respect to derivative lawsuits by investors on behalf of the fund. Part 2 of this article, which will appear in an upcoming issue of The Investment Lawyer, will focus first on the attorney-client privilege, which is critical in fund litigation. Part 2 will then cover the related topics of insurance and indemnification in the context of directors and fund litigation. It also will discuss payment of the settlement costs in fund litigation