Middle-office operations managers at alternative fund management firms accessing SS&C Technologies’ Geneva portfolio accounting system through reseller Arcesium are now caught in the crossfires of its lawsuit against SS&C Advent and its parent SS&C, with their ability to use SS&C’s Geneva portfolio accounting system possibly in question.
SS&C’s Geneva platform is one of the most popular applications used by alternative fund managers to keep track of their positions, income accruals, corporate actions and performance calculations. Fund administrators servicing alternative fund managers also use the platform to do their clients’ required middle and back-office work. Switching to another portfolio accounting system would wreak havoc on fund management and fund administrators’ operations and IT managers as they would have to readjust all of their other applications tightly wound with the Geneva platform. The Windor, Connecticut-headquartered SS&C inherited the Geneva application through its purchase of Advent Software in 2015.
The New York-based Arcesium, a middle and back-office applications provider for alternative fund managers, has just sued SS&C Advent and SS&C in a federal court in lower Manhattan alleging they illegally ended its contract in January, prevented Arcesium from winning new business and threatened to harm Arcesium’s existing clients using Geneva. Arcesium wants a jury trial, compensation for SS&C’s breach of contract and violation of the Sherman Antitrust Act, and a temporary order and preliminary injunction. The Sherman Act prohibits cartels and monopolistic practices in US commerce. As FinOps Report went to press, Arcesium had filed a brief justifying its request for a temporary order and preliminary injunction to prevent SS&C from cutting off access to the Geneva platform by refusing to renew Arcesium’s own license keys and those of Arcesium’s clients.
Arcesium’s lawsuit follows one by SEI Global Services in a Philadelphia court making similar claims of breach of contract and violation of the US antitrust law. SEI, a fund administrator which competes with SS&C’s GlobeOp unit, uses SS&C’s Geneva to service its alternative investment fund clients. SS&C, alleges SEI, unilaterally ended its agreement with SEI in January 2020, but gave SEI a temporary reprieve until January 2021. If SEI can’t sign a new contract with SS&C by then, SEI says it won’t be able to use SS&C’s Geneva system and front-office Moxy platform and could easily lose clients it can’t service. Changing its portfolio accounting system would be cost-prohibitive and could take up to three years to complete, argues SEI in its lawsuit. SEI says it won’t sign a new contract with SS&C on the grounds that SS&C has no right to change the terms of its contract which is “perennial” and that SEI did nothing to merit its unilateral termination. SS&C should ask for only a three percent annual increase in fees at most, not the forty percent it now demands, says SEI, because the terms of their contract allow for only a three percent cap on any fee hike.
The effect of Arcesium’s dispute with SS&C on Arcesium’s existing clients is a bit more difficult to decipher than SEI’s as Arcesium, a 2015 spin-off from hedge fund giant D.E Shaw, is a reseller of SS&C’s Geneva platform and the interpretation of the possible impact are in dispute. When asked by FinOps Report to comment on Arcesium’s allegations that its ability to service existing fund manager clients using Geneva could be harmed should SS&C cut off their access to Geneva, SS&C’s spokeswoman countered that Arcesium is “wrong” and is “playing games with the facts.”
Arcesium declined to comment for this article beyond what appears in its lawsuit and its recent filing supporting a temporary restraining order and preliminary injunction against SS&C’s Advent and its parent SS&C. Arcesium’s reseller agreement, signed in March 2015, allows Arcesium to integrate SS&C’s Geneva platform with Arcesium’s own platform to provide clients with the full range of middle and back-office services. The investment management fintech firm alleges that SS&C doesn’t have the right to cut off access to its Geneva platform for Arcesium and its existing clients because under the terms of Arcesium’s agreement with SS&C those clients have “continuation rights” to the licensing keys to use the Geneva system even if Arcesium and SS&C were to terminate their agreement. SS&C, says Arcesium, has no right to violate the “continuation rights” provision of its contract for any reason.
In its lawsuit filed on June 9, Arcesium identifies a “Firm E” for which SS&C’s business team initially agreed to renew the license keys for Advent only to be overruled by SS&C’s attorneys. “SS&C’s attorneys now disclaimed those [renewed] contracts claiming that the most recent offer to renew Firm E’s license was both automated and inadvertent,” writes Jeremy Feigelson, a litigation partner and co-chair of the data strategy & security practice at the law firm of Debevoise & Plimpton representing Arcesium. “To date, the defendants have refused to issue the renewed license keys.” Arcesium does not specify when the license keys expire. Arcesium then goes on to identify another Firm F whose access to Geneva could also be cut off “shortly” without saying when. Arcesium’s fund administrator clients don’t appear to be affected by the dispute with SS&C and were not mentioned in the lawsuit. Separate press releases issued by Arcesium posted on its website identify JP Morgan Chase’s alternative fund administrator unit as a user and the bank as an investor.
Based on Arcesium’s mention of only two clients in its lawsuit it appears that SEI has far more clients to worry about than Arcesium. In its 2019 annual report, SEI says that it services 520 alternative investment funds, multi-family offices and private wealth funds. Regardless of the number of Arcesium’s fund manager clients involved, the impact to its bottom line should SS&C actually cut off access to the Geneva platform would be substantial. “The loss of Arcesium’s and its customers’ access to the Geneva software would cause Arcesium to lose outright the majority of its existing customer revenue,” writes Feigelson in Arcesium’s lawsuit. In its recent supporting documentation seeking a temporary restraining order and preliminary injunction against SS&C Advent and SS&C, Arcesium further specifies that 90 percent of its revenues come from customers that have Geneva integrated into their Arcesium solutions. The identities of Arcesium’s current clients that could be affected by SS&C’s alleged refusal to renew its licensing keys for Geneva could not be verified at press time. Arcesium’s website includes press releases highlighting EJF Capital and Balyasny Asset Management as clients, but EJF Capital did not return emails seeking comment and Balyasny declined to comment.
Why won’t Arcesium just sign a new contract with SS&C? In its lawsuit against SS&C Advent and SS&C, Arcesium insists that SS&C’s new terms are unreasonable; SS&C, by Arcesium’s account, wants Arcesium to agree to not market Arcesium’s platform to any financial firm using Geneva or any of SS&C’s other products. Arcesium also would not be able to market the Geneva system to any fund administrator or prime broker. Those restrictions, according to Arcesium, would practically speaking require Arcesium to surpass historic Geneva resale volumes by at least 100 percent while marketing to only a small fraction of its original potential client base. “Given defendants’ ubiquitous presence in the market, the renewal terms the defendants’ sought to impose would have operated to foreclose Arcesium from working with nearly all of its potential customers while still requiring Arcesium to pay supracompetitive royalties,” writes Feigelson in Arcesium’s lawsuit. By Arcesium’s estimates, it could not do business with 70 percent of hedge fund managers and 60 percent of fund administrators if it were to adhere to SS&C’s demands.
SS&C also provides other post-trade processing solutions, besides Geneva, that compete with Arcesium’s platform, so it presumably wants to capture market share in that business at Arcesium’s expense, suggests Arcesium. In its lawsuit Arcesium never clearly specifies just which of its products compete directly with SS&C’s but based on each firm’s public product descriptions Arcesium’s data reconciliation module appears to rival SS&C’s Recon platform while its financial data stack would rival SS&C’s Evare. Arcesium website lists additional services such as Treasury management, and swaps margin management.
In its lawsuit against SS&C Advent and SS&C, Arcesium also offers examples of how SS&C has already prevented it from winning new business. In the case of a potential fund manager client only identified as Firm A, by Arcesium’s account Firm A was told by SS&C that it would deny Firm A access to the Geneva platform if it signed up with Arcesium. In the case of another potential fund manager customer identified as Firm C, Arcesium alleges that SS&C would not grant Firm C an enterprisewide license it needed to host the Geneva platform if it did business with Arcesium. Firm C was also told by SS&C back in 2018 that it was planning to end its relationship with Arcesium in 2020. If Arcesum’s account is accurate, it means that SS&C informed a potential Arcesium client of its intent to end its contract with Arcesium before it told Arcesium in October 2019.
SS&C insists that it did nothing wrong by refusing to continue its contracts with either SEI or Arcesium. In a statement issued to FinOps Report about SEI’s lawsuit, SS&C said that it honors the terms of all its contracts. Based on SEI’s lawsuit, it appears that SS&C started playing hardball in wanting to change the terms of its contract with SEI in 2019 after SEI tried to poach some of its employees. SS&C has just asked the Philadelphia federal court to dismiss SEI’s lawsuit which SS&C says makes erroneous “fanciful claims” about monopolization when the disagreement involves a contractual dispute. In a new press release discussing Arcesium’s lawsuit. SS&C calls it without merit and refers to Arcesium as a “disappointed licensee.” In the same press release, SS&C says it was within its right to not renew its agreement with Arcesium on unfavorable terms to SS&C. What’s more, says SS&C, it was Arcesium and not SS&C which violated the post-termination terms of the agreement. Those terms, by SS&C’s interpretation of the contract, required Arcesium to cease marketing the Geneva platform. Because Arcesium allegedly continued to market Geneva without a license to do so, SS&C apparently felt no obligation to maintain the “continuation rights provision” of its contract and allow Arcesium’s clients access to use Geneva. At least that is what Arcesium claims. Arcesium denies that it marketed Geneva after SS&C ended its contract, insisting that it instructed any potential clients to contact SS&C directly.
In a statement to FinOps Report, SS&C’s spokewoman denies that it is preventing one unidentified firm from accessing the Geneva platform saying that “the fund manager at issue is and always will be a direct licensee of Advent, The fund manager is not a resold customer of Arcesium and Arcesium has no right to a role in that customer’s Geneva license. Advent has been working directly with the fund manager at issue for weeks on a license renewal thereby avoiding the possibility of any service disruptions. As part of that process, Advent will ensure that it adequately protects its rights including regarding which third parties are permitted to access Geneva’s proprietary intellectual property.”
When it comes to the other unidentified firm, SS&C’s spokeswoman writes that Arcesium recently inappropriately used a computer-generated renewal reminder and attempted to recharacterize that reminder as a resurrection of Arcesium’s own reseller rights. Arcesium no longer has those reseller rights because of its terminated and breached reseller’s agreement. When asked by FinOps Report to clarify whether SS&C planned to renew its license key to Geneva for this particular fund manager or whether it had already cancelled the key which would deny the fund manager access to Geneva, SS&C’s spokeswoman responded with the following statement: “SS&C Advent is in the business of licensing Geneva while protecting its intellectual property rights. SS&C Advent stands behind its customers and will work with the customer at issue to avoid any service disruptions.”
When told of SS&C’s response to its claims by FinOps Report Arcesium’s spokesman responded in a statement that the firm stands by its allegations. In its brief justifying its request for a temporary order and preliminary injunction, Arcesium refers to the expiration of its own license keys for Geneva and those of two of its clients saying, “Most time-sensitive, defendants have declared they will no longer reissue the periodically updated software keys that are essential to Geneva’s functionality. A key that Arcesium used to access its own copies of Geneva already has expired and other keys are set to expire over the next few months starting in July for Arcesium’s most substantial customers.” In the court filing, Arcesium claims that if the court doesn’t grant Arcesium’s request for a temporary order and preliminary injunction, there will be an “enormous” disruption to Arcesium’s business that cannot be fixed even by monetary damages awarded down the road. As for SS&C’s claim that Arcesium’s violated the continuation terms of its contract, Arcesium counters that even if it did, any breach was “immaterial.” That’s similar to the stance taken by SEI in its lawsuit against SS&C addressing SS&C’s contention that SEI breached its contract.
Based on SS&C’s track record in previous legal disputes, Arcesium and SEI could face an uphill battle in winning their lawsuits. It took almost three years for SS&C to finally settle a case in 2019 with Tillage Commodities Fund, a former fund manager customer of SS&C’s fund administration unit SS&C GlobeOp. Tillage had sued SS&C for a cybersecurity breach that cost Tillage a whopping US$6 million and forced it to shut down. SS&C initially pointed the finger at Tillage for the cybersecurity breach and only settled the case with undisclosed terms at the eleventh hour as SS&C’s trial with Tillage had just started. In January 2020, SS&C won its lawsuit against a unit of AIG for refusing to cover SS&C’s settlement of the litigation with Tillage on the grounds SS&C’s cybersecurity insurance policy did not cover spoofing.
As a publicly traded firm, SS&C has more to worry about than just disgruntled clients or resellers. Arcesium’s lawsuit has prompted several law firms specializing in shareholder litigation to openly solicit investors to participate in class action lawsuits on the grounds SS&C may have violated securities laws and engaged in other unlawful business conduct which reduced its stock price and hurt investors. The law firms of Bragar Eagel & Squire, Pomerantz, and Bronstein Gerwitz & Grossman are asking investors in SS&C’s stock to identify themselves for the purpose of being included in the class action. The law firms’ similarly- worded press releases reference Arcesium’s lawsuit against SS&C, citing SS&C’s CEO Bill Stone allegedly saying that his company’s goal was to “take over the world” and to be the world’s “dominant player.”