The Alter Egos of Platinum Partners – “In Pari Delicto” [LAW360]

Law360 (June 24, 2019, 4:19 PM EDT) — A New York federal judge on Friday kept alive portions of Platinum Partners‘ liquidators’ lawsuit over the hedge fund’s collapse, finding in part that a Second Circuit rule doesn’t protect alter egos of Platinum from liability.

U.S. District Judge Jed Rakoff agreed with the liquidators that alleged Platinum alter ego Beechwood Capital Group LLC — a set of reinsurance and asset management companies — is not protected from liability by the Second Circuit’s 1991 ruling in Shearson Lehman Hutton Inc. v. Wagoner, which established that a plaintiff lacks standing to sue third parties over misconduct for which it shares equal blame.

Beechwood argued in April that, under Wagoner, the liquidators, as successors-in-interest to Platinum Partners Value Arbitrage Fund LP, can’t now attempt to recover funds from outsiders for the alleged $1 billion fraud carried out by Platinum’s top management and officers. But the liquidators countered that the Wagoner rule and a similar “in pari delicto” defense, Latin for “in equal fault,” don’t protect corporate insiders or alter egos, as Beechwood is alleged to be.

“As this court has explained, the rationale behind the insider exception is that ‘it would be absurd to allow a wrongdoing insider to rely on the imputation of his own conduct to the corporation as a defense,'” the court said Friday. “This rationale applies with equal force to alter egos of insiders, to whom the conduct is also imputed.”

Judge Rakoff said he doesn’t consider as insiders executives at Beechwood entities including Mark Feuer, Scott Taylor and Dhruv Narain, and other individuals allegedly involved in misconduct such as Michael Nordlicht, Kevin Cassidy, Seth Gerszberg and Michael Katz.

For nearly all of those individuals, however, the court said another exception to the Wagoner rule related to the abandonment of corporate interests applies, and refused to dismiss certain claims against them. Of these individuals, only Katz escaped the allegations entirely, with the court finding it would need to engage in inappropriate speculation to keep aiding-and-abetting claims against him alive.

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