Recently a number of cases in which investors lost their money made their way to the headlines. In many of such cases, the investors who lost their money were inexperienced and it seemed that the Court sought to use its power to protect them, but will the same apply where the investors were experienced?
In the recently decided “Milikovsky” case the Israeli Supreme Court dealt with a hedge fund who raised funds from investors. For that purpose, the fund presented to the investors a detailed presentation of the framework of the investment program that clearly included diversification of the financial investment in 50 companies listed on the exchange in the United States, but, as common in such funds, it was written in the fund’s articles that the fund managers have the authority to change the investment policy and that they will update the investors from time to time. After a while, the fund’s manager decided, contrary to the representation made to the investors and without informing or updating them, to invest funds money in a different manner while significantly increasing the risk. As a result of that, the investors lost most of their money and filed a lawsuit with the Court. The investors expected, in light of previous holdings of the Courts, that the Court will find the fund manager liable and ordered to compensate them for the lost funds.
However, the Supreme Court held that despite the misrepresentations of the fund manager, and despite the expectation of the investors to be notified of all changes made to the investment, the fund's articles that were signed by the investors allowed the fund manager to do so, even without informing the investors and the change of path was within the manager’s discretion. Thus, the Court chose to put most of the weight on the fund’s artiles and not on the misrepresentations of the fund manager. Moreover, in that case, the Court noted, and not without a reason, that the plaintiffs were "experienced investors" who should understand the risks of such investments and should have known about the terms of the articles signed.
Does this holding sets that the rules applicable to ordinary investors are different from the rules applicable to experienced investors? Maybe. Eventually, if it is proven that the investor who seeks compensation was aware of the existing risks in the investment more than a reasonable investor, the Court may impose greater responsibility on the investor and less on the fund manager. While this was not the case in the Milikovsky case, it seems that if the investors were unexperienced, the Court could have chosen to put most of the weight on the misrepresentations of the fund manager and impose greater responsibility on the fund manager.
This holding and similar holdings underline the need for professional supervision on investment of professional investors and managers. This holding (although this was not the case in the Milikovsky case) emphasizes the responsibility of the managers who in many cases find themselves defendants due to negligence in supervision. Thus, it is recommended to be accompanied by a lawyer specializing in the field and can accompany the investor not only at the time of investment, but also on an ongoing basis thereafter.