Lakonia Management Ltd. v. Meriwether

In 1994, Lakonia Management Ltd. (Lakonia) (plaintiff) invested approximately $50 million into Long-Term Capital Hedge Funds (LTC Funds). LTC Funds had a two-tier structure in which various feeder funds invested substantially all their assets into a master fund, Long-Term Capital Portfolio Company, LLC (LTC Portfolio) (defendant). LTC Portfolio was managed by Long-Term Capital Management, LP (LTC Management) (defendant), which was controlled by John Meriwether (defendant) and other principals (defendants). Aside from investor capital, LTC Funds received financing from certain banks (the banks) (defendants). The banks made loans to LTC Funds on terms favorable to LTC Funds, allowing LTC Funds to engage in highly leveraged investment activity. Lakonia’s investment was made with the feeder fund Long-Term Capital V, Ltd. (LTC V) (defendant). The offering memorandum disclosed that the investment entailed significant risk. The memorandum also informed investors that LTC V had unrestricted authority to redeem any of an investor’s shares at any time at the then-current net asset value per share. Initially, the LTC Funds earned strong returns, and Lakonia’s investment grew to over $137 million. In December 1997, LTC Funds redeemed some of its investors’ shares after determining that its capital under management was too large to pursue investment opportunities. As part of this redemption, Lakonia received over $55 million. The value of Lakonia’s remaining investment with LTC V was over $72 million. Beginning in August 1998, LTC Funds’ investment strategy began to unravel. LTC Funds was overexposed to volatility in Russian currency and the financial crisis that resulted from Russia’s debt moratorium. By the end of August 1998, LTC Portfolio’s available capital had shrunk by more than 50 percent. The banks imposed higher margin requirements on their credit arrangements with LTC Funds, further restricting LTC Funds’ cash flow. In September 1998, LTC Funds consulted Goldman Sachs to find a solution to its need for additional capital. In turn, Goldman Sachs consulted with the Federal Reserve Bank of New York and 13 of the banks and devised a consortium approach in which the banks would recapitalize the LTC Portfolio in exchange for a 90 percent interest in the assets of the LTC Portfolio, as well as operational control. The original investors would retain a 10 percent interest. LTC Funds adopted this approach, and the health of LTC Portfolio eventually increased substantially. In June 1999, Meriwether notified Lakonia that its shares would be redeemed. Lakonia received $8 million. Subsequently, Lakonia filed suit against LTC Funds’ managers, affiliates, and the banks. Lakonia alleged violations of the Racketeer Influenced and Corrupt Organizations Act. Specifically, Lakonia alleged that the management, affiliates, and banks conspired to squeeze Lakonia out of LTC Funds for insufficient consideration. The managers, affiliates, and banks moved to dismiss.