Articles By Topic
By Topic: Collateralized Debt Obligations
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From Vol. 6 No.18 (May 2, 2013)
When Can Hedge Fund Investors Bring Suit Against a Service Provider for Services Performed on Behalf of the Fund?
A federal district court recently considered whether claims brought by investors in a bankrupt hedge fund against a lender for allegedly aiding and abetting the fund manager’s breach of fiduciary duty and fraud against the hedge fund should be permitted to proceed. The fundamental question at issue was whether the investors’ claims were direct claims that should be permitted to proceed or derivative claims that should have been brought by the hedge fund and therefore should be dismissed. For another discussion of derivative suits in the hedge fund context, see “U.S. District Court Holds That Hedge Fund Investors Do Not Have Standing to Bring a Direct, As Opposed to Derivative, Claim against Hedge Fund Auditor PricewaterhouseCoopers LLP,” The Hedge Fund Law Report, Vol. 3, No. 47 (Dec. 3, 2010). This article summarizes the factual and procedural background of the case as well as the court’s legal analysis and decision.
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From Vol. 6 No.2 (Jan. 10, 2013)
SEC Continues Its Crackdown on Misleading Representations of “Skin in the Game” by Hedge Fund Managers
In many situations, the interests of hedge fund managers and investors diverge. See generally “Ernst & Young’s Sixth Annual Global Hedge Fund Survey Highlights Continued Divergence of Expectations between Managers and Investors,” The Hedge Fund Law Report, Vol. 5, No. 44 (Nov. 21, 2012). Recognizing this – and recognizing the insufficiency of the law to effectively mitigate the divergence – managers and investors have developed tools to align interests. One such tool is the pay-for-performance concept embodied in the performance fee or allocation common to hedge fund structures. See “SEC Adopts Final Rules Governing the Payment of Performance Fees to Registered Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 9 (Mar. 1, 2012). Another tool is manager co-investment or “skin in the game.” The idea here is for the manager to put his money where his mouth is by making the same investments as investors. Indeed, many hedge fund PPMs contain language to the effect that the principals of the management company have invested a “substantial portion of their net worth” in the funds. See “Investments by Hedge Fund Managers in Their Own Funds: Rationale, Amounts, Terms, Disclosure, Duty to Update and Verification,” The Hedge Fund Law Report, Vol. 3, No. 21 (May 28, 2010). However, from time to time, a manager’s claims with respect to skin in the game are at odds with the facts. The SEC is attuned to the potential dissonance between representations and reality, particularly in hedge fund marketing materials. In June of last year, the SEC settled administrative proceedings against a hedge fund manager alleging, among other things, misleading statements regarding skin in the game. See “SEC Sanctions Quantek Asset Management and its Portfolio Manager for Misleading Investors About ‘Skin in the Game’ and Related-Party Transactions,” The Hedge Fund Law Report, Vol. 5, No. 23 (Jun. 8, 2012). The SEC recently settled another administrative action based on similar allegations, this time in connection with investments in collateralized debt obligations (CDOs). This article describes relevant factual and legal points from the more recent settlement. For a discussion of another matter involving overlapping facts, see “Implications of the Second Circuit’s Decision to Reinstate Breach of Contract and Gross Negligence Claims Brought against a CDO Manager,” The Hedge Fund Law Report, Vol. 5, No. 33 (Aug. 23, 2012).
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From Vol. 5 No.48 (Dec. 20, 2012)
CFTC Grants Additional Relief from CPO Regulation for Operators of Certain Securitization Vehicles
On December 7, 2012, the CFTC’s Division of Swap Intermediary Oversight issued a letter expanding the scope of relief from commodity pool regulation for certain securitization and structured finance vehicles and their operators. This article summarizes the guidance and relief granted in the letter. See also “NFA Workshop Details the Registration and Regulatory Obligations of Hedge Fund Managers That Trade Commodity Interests,” The Hedge Fund Law Report, Vol. 5, No. 47 (Dec. 13, 2012).
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From Vol. 5 No.45 (Nov. 29, 2012)
SEC Charges Hedge Fund Manager with Impermissible Cross Trades, Inflating Valuation and Misleading Investors in a Scheme to Hide Fund Losses
On November 8, 2012, the SEC filed a Complaint in federal district court charging a hedge fund manager and its owner with engaging in impermissible cross trades, inflating values of securities in fund portfolios and misleading investors in an attempt to disguise trading losses suffered by its hedge funds incurred from investments in risky tranches of a collateralized debt obligation. This article summarizes the allegations, claims and relief sought by the SEC. For more on the law governing cross trades by hedge fund managers, see “Trading Practices Session at SEC’s Compliance Outreach Program National Seminar Addresses Need for Holistic Compliance Procedures Dealing with Allocations, Best Execution and Cross Trades,” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).
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From Vol. 5 No.33 (Aug. 23, 2012)
Implications of the Second Circuit’s Decision to Reinstate Breach of Contract and Gross Negligence Claims Brought against a CDO Manager
This article summarizes the events that led to a dispute in federal court relating to a collateralized debt obligation (CDO), a recent Second Circuit opinion in the dispute and the implications of the decision for participants in the CDO market. This article also summarizes two important practice points arising out of the decision, as identified by Cleary Gottlieb Steen & Hamilton LLP.
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From Vol. 5 No.26 (Jun. 28, 2012)
U.S. District Court Approves SEC’s Settlement with Bear Stearns Fund Managers Cioffi and Tannin
In June 2008, in the wake of the collapse of The Bear Stearns Companies, Inc. (Bear Stearns), the U.S. Department of Justice and Securities and Exchange Commission brought parallel criminal and civil enforcement actions against Bear Stearns hedge fund managers Ralph R. Cioffi and Matthew M. Tannin, alleging that they had misrepresented to investors the precarious state of the funds they managed in an effort to attract new investments and discourage redemptions. Cioffi and Tannin were acquitted of the criminal charges in 2009. The SEC and the defendants have now reached a settlement of the civil charges, which has been approved by Judge Frederic Block of the United States District Court for the Southern District of New York (Court). This article summarizes the Court’s decision, in which Judge Block highlighted the limits of the SEC’s powers in such cases.
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From Vol. 5 No.15 (Apr. 12, 2012)
Recent New York Court Decision Suggests That Hedge Funds Have a Due Diligence Obligation When Entering into Credit Default Swaps
Domestic and foreign regulators have historically afforded differing levels of protection to retail investors as opposed to sophisticated investors, such as hedge funds, based on their presumptively differing levels of financial knowledge and abilities to conduct due diligence on prospective investments. Sophisticated investors have been permitted to invest in more complicated financial products based on their presumed ability to understand and conduct due diligence on such investments. However, the flip side of enhanced access is diminished investor protection, as evidenced by a recent court decision holding that sophisticated investors have a duty to investigate publicly available information in arms-length transactions.
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From Vol. 4 No.46 (Dec. 21, 2011)
Linda C. Goldstein Joins Dechert as Partner in New York
On December 19, 2011, Dechert LLP announced that Linda C. Goldstein joined the firm as a partner in its White Collar and Securities Litigation practice. She will be resident in the firm’s New York office. Goldstein was most recently a partner at Covington & Burling LLP and a co-chair of its Securities/Derivatives Litigation & Enforcement practice.
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From Vol. 4 No.37 (Oct. 21, 2011)
CDOs are Not Necessarily Bankruptcy Remote: U.S. Judge Refuses to Dismiss Involuntary Bankruptcy Proceedings Against Cayman-Based CDO, Zais Investment Grade Limited VII
On August 26, 2011, Judge Raymond T. Lyons of the United States Bankruptcy Court for the District of New Jersey issued an opinion refusing to either dismiss or abstain from the involuntary bankruptcy proceedings filed by senior noteholders of Cayman Islands collateralized debt obligation issuer (CDO) Zais Investment Grade Limited VII. For further analysis of considerations when dealing with collateralized obligations, see “Key Legal and Business Considerations for Hedge Fund Managers When Purchasing Collateralized Loan Obligation Management Contracts,” The Hedge Fund Law Report, Vol. 3, No. 13 (Apr. 2, 2010).
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From Vol. 4 No.32 (Sep. 16, 2011)
In Second Lawsuit Arising Out of Failed CDO Deal, UBS Is Not Permitted to Pursue Claims Against Hedge Fund Manager Highland Capital Management to the Extent those Claims Could Have Been Brought in its Original Suit
In 2007, UBS Securities LLC and two affiliates (UBS) agreed to finance and serve as placement agents for certain collateralized debt obligations (CDO) that hedge fund manager Highland Capital Management, L.P. (Highland) proposed to issue. As a result of the 2008 financial crisis, the CDO deal collapsed in December 2008. UBS then sued Highland in New York State Supreme Court under the indemnification provisions of the CDO deal to recover the losses it allegedly sustained.
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From Vol. 3 No.26 (Jul. 1, 2010)
In Enforcement Action Against Investment Adviser ICP Asset Management, LLC, SEC Alleges More than $1 Billion of Improper Trades, Trades at Inflated Prices and Other Fraudulent Conduct in Connection with ICP’s Management of Triaxx CDOs
The SEC has commenced an enforcement action against investment adviser ICP Asset Management, LLC (ICP), its broker-dealer affiliate ICP Securities, LLC, holding company Institutional Credit Partners, LLC, and their principal, Thomas C. Priore. ICP was the collateral manager of four Triaxx collateralized debt obligations (CDOs) that invested primarily in mortgage-backed securities. The SEC claims that ICP engaged in a variety of prohibited and fraudulent conduct, including self-dealing, breach of its fiduciary duties to the Triaxx CDOs, engaging in fraudulent transactions among those CDOs, trading to benefit one CDO at the expense of the others, and making trades that benefited another ICP client at the expense of the Triaxx CDOs. The SEC alleges violations of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 and seeks an injunction against future violations, disgorgement of profits and civil penalties. We summarize the SEC’s complaint. See also “Defunct Hedge Fund Basis Yield Alpha Fund (Master) Sues Goldman Sachs for Securities Fraud Arising Out of the Fund’s Investment in Goldman’s Timberwolf CDO,” The Hedge Fund Law Report, Vol. 3, No. 24 (Jun. 18, 2010).
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From Vol. 3 No.24 (Jun. 18, 2010)
Defunct Hedge Fund Basis Yield Alpha Fund (Master) Sues Goldman Sachs for Securities Fraud Arising Out of the Fund’s Investment in Goldman’s Timberwolf CDO
Hedge fund Basis Yield Alpha Fund (Master) (Fund) has commenced a civil securities fraud suit against Goldman Sachs (Goldman) in the Southern District of New York. In March 2007, Goldman created a collateralized debt obligation (CDO) known as Timberwolf 2007-1, which was allegedly part of Goldman’s efforts to reduce its exposure to the subprime mortgage market. The Fund agreed to purchase $100 million face value of interests in Timberwolf for about $80.8 million. Within months of the purchase, Timberwolf had declined in value by more than 80 percent, resulting in the Fund’s collapse and subsequent liquidation. The Fund alleges that, in selling Timberwolf interests to the Fund, Goldman failed to tell the Fund that it considered Timberwolf to be a bad deal, that Goldman expected the value of CDO’s based on the subprime mortgage market to decline in value, and that Goldman was short selling both the stock of companies involved in the subprime business and the underlying CDO’s owned by Timberwolf. Despite that, the Fund alleges that Goldman assured the Fund that the price for the Timberwolf interest was “a good entry price” and that the subprime market had stabilized. We summarize the allegations made by the Fund.
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From Vol. 2 No.42 (Oct. 21, 2009)
Pursuit Partners, LLC v. UBS AG: Implications for Hedge Funds That Invested in Collateralized Debt Obligations and Other Structured Products
On September 8, 2009, the Connecticut Superior Court entered an order requiring two UBS entities to put aside more than $35 million to ensure that a hedge fund claiming fraud in its purchase of notes tied to UBS collateralized debt obligations (CDOs) would be adequately compensated in the event it was successful in its lawsuit against UBS. The case, Pursuit Partners, LLC et al. v. UBS AG, et al., is notable for a number of reasons. Chief among these is the rarity of lawsuits filed by purchasers of CDOs notwithstanding the anecdotal evidence indicating that most CDOs have suffered massive declines in value. The lack of lawsuit filings by CDO purchasers has continued to puzzle industry experts who confidently predicted that the subprime mortgage crisis would result in an explosion of litigation by purchasers of securities and derivatives tied to subprime mortgages including CDOs. There is no obvious explanation for why this expected litigation explosion did not occur beyond the general distaste that non-public institutional investors seem to have for lawsuits in general and the almost universally held assumption within the hedge fund industry that nobody could have anticipated the collapse of the subprime mortgage securities market. The Pursuit case however, renders that assumption highly suspect. As the limitations clock for filing suit continues to tick down for purchasers, hedge funds with significant losses in mortgage-backed securities, especially those headquartered in Connecticut, should examine closely the Pursuit court’s holding in evaluating any decision not to pursue litigation against sellers. In a guest article, Darren Kaplan, a Partner at Chitwood Harley Harnes LLP, analyzes the factual background of the Pursuit case; the court’s legal analysis; and the lessons that hedge fund managers can draw from the case.
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