Peloton last week told investors that it was liquidating its $2 billion ABS Fund after lender banks pulled back on credit. It held out hopes that it could salvage its second fund, the $1.6 billion Multi-Strategy Fund, even though some 40 percent of that fund's assets were invested in the ABS Fund.

Today, however, the fund told investors that the Multi-Strategy Fund is being liquidated in coming days, with the proceeds returned to investors, the source said.

It is unclear at this point what proceeds, if any, investors will get from the liquidation of the two funds, the company told investors.

Court papers filed recently suggest two partners at one of the nation's most active firms for shareholder lawsuits asked a federal court to approve expenses that were improperly inflated.

The documents were filed in federal court last week as part of a guilty-plea agreement for John Torkelsen, a former expert witness on damages who was used by Milberg Weiss LLP and other plaintiffs class-actions firms in the 1980s and '90s. Mr. Torkelsen agreed to plead guilty to perjury for making false statements in federal court.

In connection with the plea agreement, the government submitted a statement, which Mr. Torkelsen attested to as true, saying that on at least three occasions he submitted inflated fee requests to courts, and that the law firm he worked with knew the requests were inflated. That firm, which the plea papers refer to only as a New York firm, was Milberg Weiss, according to a person familiar with the situation.

Two partners at the law firm now called Coughlin Stoia Geller Rudman & Robbins LLP, which spun off from Milberg Weiss in 2004, were involved in a lawsuit mentioned in the plea statement while they were lawyers at Milberg Weiss. Filed in 1995, the lawsuit alleged that Sunrise Medical Inc., a medical-product manufacturer, fraudulently overstated its income. In 1996, Mr. Torkelsen filed a sworn statement that his firm incurred $420,000 in fees in the case. But according to the plea statement, that amount was inflated by $130,000, a discrepancy that both Mr. Torkelsen and the law firm knew about, according to the plea papers.

In 1996, Coughlin Stoia lawyer Keith Park, then at Milberg Weiss, filed a sworn declaration in the Sunrise case that asked the court to reimburse its expenses for experts. Mr. Torkelsen's firm was one of Milberg's experts in the case. Mr. Park asserted that Milberg Weiss had kept an accurate record of its expenses.

Coughlin Stoia name partner Patrick Coughlin, then a Milberg Weiss lawyer, filed a sworn statement asking the court to approve the settlement and to reimburse Milberg Weiss for its expenses in the case. Mr. Coughlin described Mr. Torkelsen's firm and other experts in the case as "instrumental in developing the evidence and quantifying the damages suffered by the class." The expenses were approved, as was the settlement of the case, for $21 million in damages.

It isn't known whether Messrs. Park or Coughlin knew fees were inflated. They aren't named in Mr. Torkelsen's plea papers. "Any suggestion that anyone here did anything improper in this matter is inaccurate and irresponsible," said Coughlin Stoia in a statement. A firm spokesman declined to provide specifics. Through a spokesman, Messrs. Coughlin and Park declined to comment.

Neither of the lawyers, nor the firm, has been accused of wrongdoing, and prosecutors are unlikely to charge any lawyers in connection with Mr. Torkelsen's criminal conduct, according to people familiar with the investigation

"We are not aware of any partner of Milberg Weiss LLP having knowledge of any of the misconduct detailed in Mr. Torkelsen's plea agreement," Milberg Weiss said in a statement.

The government's investigation of Mr. Torkelsen was part of a broader investigation of Milberg Weiss, which was charged in 2006 with paying improper kickbacks to clients. Milberg Weiss and its senior partner, Melvyn Weiss, are fighting the charges. Three other former Milberg Weiss lawyers, including William Lerach, who moved to what is now the Coughlin firm at the time of the 2004 split, have pleaded guilty.

As part of Mr. Lerach's plea agreement, reached last fall, the government agreed not to prosecute Messrs. Coughlin or Park in connection with various matters, including the work of a "Princeton" damages expert for Milberg Weiss or Coughlin Stoia. Mr. Torkelsen's firm was called Princeton Venture Research Inc. No other lawyers were specifically named in Mr. Lerach's plea agreement.

The government said Mr. Torkelsen's inflated fees were part of a broader scheme to help conceal the true nature of "the New York law firm's" payment arrangement with the expert. A person familiar with the matter identified the firm as Milberg Weiss. Mr. Torkelsen would present himself to courts as an independent expert when in fact he was paid on a contingent basis, with his payment depending on the plaintiffs prevailing in the case, the government said. Securities lawyers say that kind of payment arrangement creates a potential conflict, because it could encourage an expert to exaggerate the extent to which plaintiffs have been harmed.

Plaintiffs lawyers typically must front their expenses, such as expert fees, in contingency-fee suits, and they recoup them if the suit is successful. By paying an expert on a contingent basis, a law firm wouldn't have to take that risk.

Inflating fees in successful cases allowed the New York firm to make up for fees not paid out to Mr. Torkelsen in unsuccessful cases, the plea papers say. The costs of these makeup payments were borne at least in part by class-action plaintiffs, who in some instances paid for work that Mr. Torkelsen didn't perform in their cases.

Mr. Torkelsen is in federal prison after being convicted on unrelated charges. His lawyer didn't respond to a request for comment.

Mr. Torkelsen once was one of the top damages experts in the securities-fraud field, according to securities lawyers. From 1993-96, he billed class-action firms more than $60 million, according to the papers accompanying his plea agreement.

Coughlin Stoia is one of the nation's leading firms in securities class actions, in which shareholders typically blame stock losses on misleading statements by corporate executives. The firm topped the charts in terms of total settlements in such cases in 2006, the most recent year for such data, according to RiskMetrics Group Inc.

Coughlin Stoia has been particularly active of late in the area of securities class actions related to the subprime-lending meltdown. According to a report last month by Navigant Consulting, it has filed more such suits than any law firm -- more than a dozen. Mr. Coughlin is the lead lawyer in the Enron Corp. securities-fraud litigation, in which Coughlin Stoia seeks almost $700 million in fees for itself and other plaintiffs lawyers in the case.

Samuel Feder, the general counsel of the Federal Communications Commission, is leaving his post of about three years to become a partner at law firm Jenner & Block. Feder, who has worked closely with Chairman Kevin Martin since coming to the FCC in 2001, will be replaced by Matthew Berry, according to release by the agency. Feder worked with Martin on radio spectrum and international policy issues.

"Sam provided exceptional legal advice on every matter we faced and also played a crucial role in policy development. I have worked with Sam since the day I became a Commissioner in 2001, and I will greatly miss his excellent judgment and wise counsel," Martin said in a release.

The dispute over a Burlington, Conn., teenager's Internet journal gave rise on Tuesday to a wide-ranging and contentious federal court hearing about free speech, whether schools can regulate students' language off campus and how the Internet blurs the boundaries of a school campus.

Avery Doninger, the 17-year-old high school senior at the center of the case, sat in the front row as a three-judge panel of the U.S. 2nd Circuit Court of Appeals lobbed questions at the attorneys. Lawyers for both sides described the hearing as uncharacteristically lengthy and suggested that the duration underscored the case's position in new legal territory.

In simplest terms, the hearing Tuesday addressed whether Doninger should be allowed to serve as senior class secretary at Lewis S. Mills High School and, as a class officer, speak at her graduation.

The principal had barred Doninger from serving on the student council because of derogatory comments she made about school officials in an Internet blog. A lower court judge denied an injunction that would have allowed her back on the council.

U.S. District Court Judge Mark Kravitz ruled in August that Doninger had not shown a "substantial likelihood" that she would succeed in challenging the constitutional validity of her principal's decision.

The appeals court did not rule Tuesday, but the judges raised questions ranging from the specifics of the high school's student council election procedures to how the Internet changes students' rights to free speech.

The attorneys staked out opposite positions on the free-speech question.

Asked whether schools should be allowed to regulate anything students write on the Internet, Doninger's attorney, Jon L. Schoenhorn, argued that the Internet should not give schools more cause to regulate off-campus speech. "It's just a bigger soapbox," he said.

The school officials' attorney, Thomas R. Gerarde, argued that the Internet has fundamentally changed students' ability to communicate, allowing them to reach hundreds of people at a time. If a student leader makes offensive comments about the school on the Internet, the school should have the right to act, said Gerarde, who represents Mills Principal Karissa Niehoff and former Region 10 Superintendent Paula Schwartz. "We shouldn't be required to just swallow it," he said.

Doninger's case began with a dispute about the school's annual Jamfest, a battle-of-the-bands-type program that Doninger had helped coordinate. Frustrated that Jamfest was not going ahead as scheduled, Doninger wrote on her livejournal.com weblog that "Jamfest is canceled due to the douchbags [sic] in central office." She also encouraged others to write or call Schwartz "to piss her off more," and included an e-mail her mother wrote as an example.

In fact, Jamfest wasn't canceled and was rescheduled. After administrators found the blog entry, about two weeks after Doninger wrote it, Niehoff told Doninger to apologize to Schwartz, show her mother the blog entry and remove herself from seeking re-election as class secretary.

Doninger agreed to the first two, but refused to withdraw her candidacy. Administrators did not allow her to run, though enough students wrote her name on the ballot that she won. She was not allowed to serve.

In his August ruling, Kravitz suggested that while Doninger wrote her blog entry off school grounds, she could be punished for it because the blog addressed school issues and was likely to be read by other students.

The issue of on-campus and off-campus speech was a key theme Tuesday as attorneys and judges grappled with how the existing legal framework for school-speech issues applies to the Internet.

Student-speech issues have long been governed by a 1969 U.S. Supreme Court case. It established that disruptive conduct by students is not constitutionally protected, but that schools can prohibit expression only if they can show that not doing so would interfere with schoolwork or discipline.

A 1986 Supreme Court ruling added another cause for schools to regulate speech, allowing them to prohibit "vulgar and lewd" speech if it would undermine the school's basic educational mission.

But those cases involved speech that took place on school grounds or during a school activity.

Much of the discussion Tuesday involved another 2nd Circuit Court of Appeals case, Wisniewski v. Board of Education of the Weedsport Central School District in New York. A student was suspended after he created an instant-messaging icon, visible to his friends, that suggested his English teacher should be shot. The court upheld the suspension last year, saying it was reasonable to expect that the icon would come to the attention of school authorities and could create a risk of substantial disruption to the school environment.

Gerarde, the school officials' attorney, argued that the Wisniewski case extended the boundaries of school discretion to the Internet and allowed Lewis Mills to sanction Doninger's blog, which he said was as potentially disruptive as the Wisniewski case.

Doninger's post caused administrators to receive numerous telephone calls and e-mails — including offensive ones, according to court records — and prompted students to consider staging a sit-in. That forced Schwartz to disrupt a presentation she had been scheduled to make to a visiting Chinese delegation.

Gerarde said speech off campus can affect the school. But Judge Sonia Sotomayor challenged his argument, noting that "Pedagogical rights can't supersede the rights of students off campus to have First Amendment rights."

Schoenhorn, Doninger's attorney, offered a different interpretation of the Wisniewski case. The suspension was allowed in that case not because the Internet could be considered on-campus, but because the student's behavior clearly created a risk of disruption, something the school would be able to regulate under the 1969 Supreme Court ruling. In Doninger's case, he said, there was no similar risk of disruption, particularly by the time administrators found the blog post.

The judges asked several questions about the implications of each attorney's views on schools' regulating Internet speech.

"If students are free to say offensive things about administrators on their home computers, chaos will rule," Judge Loretta Preska told Schoenhorn.

They already say offensive things about their teachers, Schoenhorn replied, noting that whole websites are devoted to rating teachers.

Sotomayor asked Gerarde how far school regulation of Internet speech could go. What if a student made false and offensive posts about the mayor and then wanted to run for student council, he asked. Would a principal be able to bar the student from running because she had not shown good citizenship?

Gerarde said it would depend on how likely it was that the school administration would see the blog. But Sotomayor said that would suggest the consequences would be related to how active a student was.

Gerarde posed another situation: What if a class president drove a mile off campus and e-mailed vulgar comments about the principal to hundreds of students? Should the student be able to say he's off campus and the school can't do anything about it? "That's wrong," Gerarde said.

If vulgar speech relates to the school or a public event, the school should be able to regulate it, Gerarde said.