Financial Institutions and Services Litigation: Financial Institutions Special Situations
We represent global and US domestic financial institutions, private equity firms, sophisticated capital providers, asset managers, investment funds, and senior executives against the full spectrum of litigation and investigations involving financial fraud and market manipulation. Our approach leverages a nuanced understanding of financial markets and products, deep prior experience with changes in the economic cycle and financial crises, and practical insights into evolving liability standards.
With increased uncertainty around tariffs and other federal policies governing the US economy, the historically high levels of commercial and government debt in the United States and other major economies, and continued volatility in the United States and global stock markets, financial institutions, private capital providers, and asset management firms are likely to face significant potential legal exposure in a number of areas. The convergence of these risks creates a particularly challenging environment, as legal probes may trigger parallel enforcement actions, investor litigation, and bankruptcy proceedings simultaneously.
Our team is highly experienced in defending clients against regulatory investigations and enforcement actions brought by agencies such as the US Department of Justice (DOJ), US Securities and Exchange Commission (SEC), United States Commodity Futures Trading Commission, and state attorneys general regulators. We guide financial institutions through every stage of the process from initial inquiry and subpoena response to enforcement defense and litigation, helping to eliminate or reduce legal exposure and protect business interests. Leveraging deep industry knowledge and strong relationships with regulatory authorities, we have successfully resolved complex matters, often achieving favorable outcomes such as termination letters or the dismissal of claims. Our proactive approach ensures clients are prepared to respond effectively to regulatory scrutiny, safeguarding their reputation and enabling continued growth in a rapidly evolving environment.
Primary areas of exposure are likely to include:
- Portfolio valuation practices: The DOJ and SEC have intensified scrutiny of valuation practices at private equity and private capital firms and hedge fund managers, focusing on whether firms maintain adequate policies and procedures for determining fair value of illiquid investments. The risk is particularly acute during market dislocations when the gap between reported valuations and realizable values becomes apparent.
- Securities litigation and related Blue Sky and breach of fiduciary litigation: Investors who suffered losses may bring private civil actions alleging fraud, breach of fiduciary duty, or violation of contractual obligations related to valuation practices. Market participants and investors may claim they were misled about portfolio performance, paid excessive fees based on inflated valuations, or made investment decisions based on materially false information. These cases often involve allegations that managers failed to properly mark down distressed investments, used outdated comparables, or selectively applied valuation methodologies to present an artificially robust picture of cash generation, liquidity, creditworthiness and asset price. Class action lawsuits and individual investor claims can result in substantial damages, particularly where plaintiffs can demonstrate a pattern of systematic overvaluation or show that managers prioritized fundraising or fee generation over accurate reporting.
- Bankruptcy claw back actions: Bankruptcy trustees may pursue fraudulent transfer claims against managers who extracted management fees, monitoring fees, or transaction fees based on inflated valuations, arguing these payments constituted transfers made while the entity was insolvent or those that rendered it insolvent. Similarly, distribution claw backs can target carried interest payments or return of capital distributions made to managers when the underlying valuations supporting those distributions prove to be overstated. These actions encompass several years depending on jurisdiction and whether fraud is alleged.
- Antitrust actions for restraint of trade: Various civil antitrust actions are filed by distressed borrowers against creditor groups that have sought to amend, extend or refinance lending terms. These civil actions are adopting antitrust theories of prosecution implemented by long-standing DOJ Antitrust Division criminal investigations in the financial sector, dating back to 2022. In such contexts, common business practice calls for creditors to enter standstill or cooperation agreements while the group—acting as a single unit—seeks to negotiate new terms with the borrower. In certain instances, the creditor group will deploy a liability management transaction or exercise to offer alternative (but sometimes punitive) mechanisms for a distressed company to raise additional capital. Because in certain instances the debt holders constitute a substantial portion of the relevant credit market, borrowers are now accusing the creditors of engaging in conduct that inhibits their access to the broader credit markets and violates the federal antitrust laws such as the Sherman Act.
