Culhane Quoted in Private Funds Management on Fund-Related Legal Fees

In "Shouldering the Burden of Legal Fees," Private Funds Management interviewed Investment Management partner Stephen Culhane regarding the breakdown of fund-related legal fees in extraordinary circumstances, in which many times limited partners (LPs) are responsible for payment.

In short, any legal fees related to a fund are considered a fund expense, with exceptions for gross negligence and criminal misconduct. While most limited partnership agreements (LPAs) indemnify the general partner (GP) or management company for legal fees related to fund activity, internal matters such as wrongful termination or sexual discrimination lawsuits are paid for by the GP. Questions arise when there is ambiguity surrounding which activities are considered on behalf of the fund and which are on behalf of the GP.

"Basically, the fund is acting as a GP's insurance fund for any claims that may arise that do not constitute gross negligence, willful malfeasance or violation of applicable law," explains Culhane. "[If] the manager enters into a settlement, so that there's no determination of wrongdoing, those indemnity provisions will cover the GP and investment advisors… So 99 percent of these claims will be covered by LPs."

For the remainder of claims, LPs are obligated to prove gross negligence, willful misconduct or violation of applicable law to get out of legal costs. As a result, LPAs are demanding exceptions for claims made between employees solely against one another, leaving GPs to fund the defense of discrimination, harassment or wrongful termination suits. Culhane explains that "Oftentimes GPs will purchase insurance to cover the costs of those suits… [but] any violation of criminal law, can't, by its very nature, be indemnified."

Overall, the best policy is to maintain transparency between the GP and LP on any litigation, particularly for firms registered with the SEC.

"If the managing partner gets a Wells letter or is indicted, that should be communicated," Culhane states. "Otherwise, if you're calling down capital or out raising a fund, the SEC may take the view the manager has engaged in fraud by not communicating the existence of the investigation."