Whistleblower Exposes Hedge Fund for Misleading Investors

Dhir v. Carlyle Group, 3:16-cv-00219, U.S. District Court, District of Connecticut

A hedge fund employee decided to blow the whistle on the company’s misstatements to investors regarding its financial investments in certain derivative products. The plaintiff, Nikhil Dhir, a former portfolio manager at the hedge fund, claims that the firm misstated both the amount of assets the firm had invested in these derivative products, as well as the risk associated with the products. Dhir alleges that Vermillion hedge fund founders, Chris Nygaard and Drew Gilbert, “knowingly and intentionally” advertised the fund has having low risk and volatility, even though freight derivatives are highly volatile and not liquid.

Even though Dhir generated $11.5 million in profits for the firm in 2014, Dhir was fired the day before he was supposed to receive his 2014 bonus in January 2015 along with others who complained about the hedge fund’s exposure. Nygaard and Gilbert were allegedly fired from the hedge fund in June 2015. Before he was fired, Dhir and others told managers in a meeting and in writing that they were concerned about the high volatility in a liquid investment fund. In addition, the company told investors that the fund would not dedicate more than 30% of assets in a single commodity, but in reality, the fund invested more than 90% of its assets in freight derivatives.

The case could also present another challenge to the 5th Circuit’s Asadi framework for assessing whistleblower claims under the Dodd-Frank Act. The 5th Circuit has previously held that Dodd-Frank whistleblowers must first complain to the SEC before they are entitled to Dodd-Frank’s protections. However, the Federal District Court in Connecticut has previously found in favor of whistleblowers who did not first go to the SEC in Kramer v. Trans-Lux and that applying a narrower reading of the statute is inconsistent with the goal of the Dodd-Frank Act.

In July 2015, the Connecticut District Court granted plaintiff leave to file an amended complaint, granted a motion to transfer to another district, and denied without prejudice defendant’s motion to dismiss. In August 2016, the case was transferred from Connecticut to the United States District Court for the Southern District of New York, case no. 1:16-cv-06378.

Tagged: Dodd-Frank Act, Enforcement Bodies, Securities and Exchange Commission (SEC), Whistleblower Laws (Federal)