Fund of Funds Indemnification Clause of the Day

A prescient bit of CYA was inserted into the fund prospectus for Kingate Global, a Madoff feeder fund:

Kingate warned in its fund prospectus “there was always the risk that the assets with the investment adviser could be misappropriated”.

“In addition, information supplied by the investment adviser may be inaccurate or even fraudulent. The co-managers [Kingate and Tremont] are entitled to rely on such information (provided they do so in good faith) and are not required to undertake any due diligence to confirm the accuracy thereof,” it said.

I’ll be fascinated to see whether this kind of legal small print does what it was clearly intended to do — which is to protect Kingate in court when the inevitable lawsuits arrive. My gut feeling is that either Madoff’s feeder funds will be found liable or they won’t; but that the presence of this language in the prospectus of one such fund won’t be enough to save it if all the others end up having to pay damages.

Still, the person who drafted the prospectus is probably patting himself on the back right now — and, if Kingate does end up being protected by this clause, you can be sure that it’s going to start popping up in all manner of other prospectuses from here on in.

Update: I’ve been asked, for the record, to note that Kingate and Tremont are no longer co-managers of this fund, although they both continue to have significant Madoff exposure. Dealbreaker has the Tremont private placement memorandum, which has no such language.

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