LBO Funds

In re ML-Lee Acquisition Fund II LP and ML-Lee Acquisition Fund (Retirement Accounts) II LP Securities Litigation, 848 F. Supp. 527 (D. Del. 1994); Seidel v. Lee, 1994 WL 913930 (D. Del. 1994); Seidel v. Lee, 954 F. Supp. 810 (D. Del. 1996)
We represented Merrill Lynch in a series of class actions brought by investors in two LBO funds with aggregated assets in excess of $450 million. The funds were designed to invest in mezzanine financing and were registered as business development companies under the 1940 Act. The actions, which were brought against the funds’ adviser, general partners, and underwriters, claimed that defendants engaged in prohibited “related-party transactions,” resulting in breaches of their fiduciary duties under Sections 36(a) and 57 of the 1940 Act and violations of Sections 17(j) and 48 of the 1940 Act and various sections of the 1933 and 1934 Acts. After partially granting defendants’ motion to dismiss several of plaintiffs’ claims on the grounds that there is no private right of action against aiders and abettors of alleged violations of the 1940 Act and that the statute of limitations applicable to the 1940 Act claims had expired, the court granted defendants’ motion to strike numerous allegations from plaintiffs’ amended complaints, thereby eliminating over $100 million in potential damages. Following extensive discovery and motion practice, plaintiffs agreed to settle both actions, as well as related actions. Under the settlement, defendants paid no money for release of the 1933 and 1934 Act claims and paid only a very small fraction of the claimed damages for release of the other claims.

Winston v. Mezzanine Investments LP, 648 N.Y.S.2d 493 (Sup. Ct. N.Y. Co. 1996)
We also represented Merrill Lynch in a class action brought by an investor in a $500 million LBO fund. The fund, which was registered as a business development company under the 1940 Act, was the first of its kind to permit individual investors to invest in mezzanine securities issued in connection with LBO transactions. Plaintiff alleged that the fund and its affiliates violated the fund’s partnership agreement by improperly paying the fund’s investment adviser incentive compensation between 1987 and 1990. Plaintiff contended that, if unrealized losses experienced by the fund were taken into account, the fund had failed to meet certain “priority return” targets that were prerequisites to the payment of incentive compensation to the investment adviser. After a five-day bench trial and the submission of voluminous post-trial briefs and proposed findings of fact, the court dismissed plaintiff’s claims against Merrill Lynch and its wholly owned subsidiaries.