The California Public Employees’ Retirement System, the largest public pension fund in the United States, rarely takes a stand as an amicus in trial court. But in an amicus brief filed earlier this month, Calpers warned that the future of private investment in California is at stake in a dispute over a few million dollars in unpaid bonuses to former employees of the now-defunct HRJ Capital. Unless a state-court judge overturns a colleague’s ruling that limited-partner investment funds are on the hook for liabilities of the general partner and fund manager, Calpers said, California risks losing its stature as an incubator of start-up business.
Lawyers for the former employees, meanwhile, contend that Calpers and the funds are drastically overstating the significance of a narrow, fact-based opinion with no precedential impact. On Thursday, both sides will make their cases to Judge Patricia Lucas of Santa Clara Superior Court.
Here’s the much-condensed backstory on the litigation that may – or may not – change the private equity industry. Darren Wong and Duran Curis once held coveted jobs with HRJ Capital and HRJ Capital Management, a fund-of-funds established by former San Francisco football stars Harris Barton and Ronnie Lott. But HRJ, which managed 22 limited-partner private equity funds, ran into trouble in the financial crisis. When management of the funds was eventually assumed by another company, Capital Dynamics, Wong and Curis lost their jobs. Their lawyers at Kirkland & Ellis eventually claimed Wong and Curis were owed about $4 million in unpaid bonuses and millions more in unpaid management fees.
Among the defendants Wong and Curis blamed for failing to pay up were several of the funds managed by HRJ. These funds were set up, like most private equity funds, as limited partnerships that contracted with a sponsoring general partner. The general partner was, in turn, responsible for managing the funds. with responsibility for managing the funds. I’m collapsing some of HRJ’s structural layers for the sake of simplicity, but Wong and Curis essentially said that through the various partnership and management agreements between HRJ entities, HRJ Capital and HRJ Capital Management were agents of the limited-partner funds, which had authorized the HRJ entities to act on their behalf. That agency relationship, as the plaintiffs explained in a summary judgment brief, made the funds liable for HRJ’s obligations to Wong and Curis.
The funds’ counsel at Orrick, Herrington & Sutcliffe said reality was quite to the contrary. There was nothing in the contracts that authorized the fund manager to bind the limited partner funds to HRJ’s obligations. Indeed, according to the funds, the agreements expressly stated that the managing entities were solely responsible for their employees. The funds paid their management fees to the general partner entities, they argued. What HRJ did with the fees was not their problem.