The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Big Boy Letters

  • From Vol. 6 No.13 (Mar. 28, 2013)

    How Can Hedge Fund Managers Understand and Navigate the Perils of Insider Trading Regulation and Enforcement in Hong Kong and the People’s Republic of China

    An old Chinese curse states: “May you live in interesting times.”  This proverb is often coupled with a more severe curse: “May you come to the attention of those in authority.”  For institutional investors trading in markets in Hong Kong and Mainland China (People’s Republic of China or PRC), these are indeed “interesting” regulatory times.  More importantly, an evolving legal and regulatory landscape has significantly increased the likelihood that those traders who are not informed and careful in their research and trading on those markets shall eventually “come to the attention of those in authority.”  For a further discussion of regulatory requirements governing establishing a hedge fund manager presence in Asia, see “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Four of Four),” The Hedge Fund Law Report, Vol. 5, No. 3 (Jan. 19, 2012).  In a guest article, Michael A. Asaro and Douglas A. Rappaport, both partners at Akin Gump Strauss Hauer & Feld LLP, and Patrick M. Mott, an associate at Akin Gump, examine the provisions of Hong Kong and PRC insider trading law most important to U.S.-based hedge fund managers.  For the sake of comparison, the authors also discuss the corresponding provisions of U.S. insider trading law.  For a related discussion of U.S. and U.K. insider trading law, see “Perils Across the Pond: Understanding the Differences Between U.S. and U.K. Insider Trading Regulation,” The Hedge Fund Law Report, Vol. 5, No. 42 (Nov. 9, 2012).  Importantly, in some instances, the insider trading laws in the PRC and Hong Kong may require hedge fund managers to proceed more cautiously than they would with regard to similarly-situated U.S. issuers.  Given that corporate and IR executives in Hong Kong and the PRC may lack the training and vigilance of their U.S. counterparts, it is crucial that hedge fund managers understand the rules applicable to trading on selectively disclosed inside information in these jurisdictions.  The risk of civil and criminal liability for foreign investors has increased as regulators push to clean up the laissez-faire attitude towards inside information that has historically prevailed in the Hong Kong and PRC markets.

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  • From Vol. 6 No.11 (Mar. 14, 2013)

    Proskauer Partner and SEC Enforcement Division Veteran Ronald Wood Explains the Implications for Hedge Fund Managers of Structure and Staffing Changes at the SEC

    In the past few years, the SEC’s Division of Enforcement has refocused its efforts with respect to the investment management industry via structure and staffing.  On the structuring side, the Division of Enforcement has established specialized units, such as the Asset Management Unit, devoted to addressing investor and systemic risks raised by private funds and their managers.  On the staffing side, the Division of Enforcement has hired investment management industry professionals – including hedge fund managers, analysts, operating professionals and due diligence experts – to staff these units.  With this new-found expertise, SEC staff not only “know where the bodies are buried,” but also “understand how they got there,” according to Bruce Karpati, Chief of the Asset Management Unit.  See “OCIE Director Carlo di Florio and Asset Management Unit Chief Bruce Karpati Address Examination and Enforcement Priorities for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).  On the foundation of its new expertise, the Division of Enforcement initiated 147 enforcement actions against investment advisers and investment companies in fiscal year 2012.  To provide deeper insight and actionable analysis on what the structuring and staffing changes at the Division of Enforcement mean for hedge fund managers, The Hedge Fund Law Report recently interviewed Ronald Wood.  Wood is a partner in the Securities Litigation Group at Proskauer Rose LLP, and prior to Proskauer spent a decade in the Division of Enforcement.  Our interview covered topics including SEC enforcement priorities; the use of reports filed with the SEC to identify enforcement targets; the SEC’s aberrational performance initiative; insider trading best practices; paid access to corporate executives; track record portability; due diligence on Chinese companies; pay to play issues; “big boy” letters; and FCPA concerns for hedge fund managers.  This article contains the transcript of our interview with Wood.  This interview was conducted in connection with the Regulatory Compliance Association’s upcoming Regulation, Operations & Compliance 2013 Symposium, to be held at the Pierre Hotel in New York City on April 18, 2013.  That Symposium is scheduled to include a panel entitled “Post SAC Capital – Investigation, Enforcement & Prosecution of Hedge & PE Managers.”  For a fuller description of the Symposium, click here.  To register for the Symposium, click here.  Subscribers to The Hedge Fund Law Report are eligible for a registration discount.

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  • From Vol. 4 No.20 (Jun. 17, 2011)

    Insider Trading and Debt Securities: Practical Tips for Hedge Funds in Coping with Regulatory Enforcement

    Recent events have brought increased regulatory and judicial focus on the world of debt instruments.  The stock market crash of the fall of 2008 was largely precipitated by the implosion of debt instruments linked to sub-prime mortgages loans.  These market crises put into relief the relative size and power of the bond markets.  The equity markets were, at least as of mid-2009, less than half the size of the debt markets, $14 trillion versus $32 trillion in the U.S. and $44 trillion versus $82 trillion globally.  Perhaps understanding this, since 2008, the SEC has begun new, unprecedented investigations of insider trading in the realm of debt instruments.  In a guest article, Mark S. Cohen, Co-Founder and Partner at Cohen & Gresser LLP, and Lawrence J. Lee, an Associate at Cohen & Gresser, discuss: hedge funds and the debt markets; the law of insider trading; potential sources of inside information; relationships that are likely to give rise to duties of confidentiality in connection with a debt trading strategy; types of insider trading cases concerning debt securities and credit, including discussions of specific cases involving derivatives, bankruptcy, distressed debt, government bonds and bank loans; and practical steps that hedge fund managers can take to avoid insider trading violations when trading various types of debt and debt-related instruments.

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  • From Vol. 3 No.39 (Oct. 8, 2010)

    New York Supreme Court Suggests that “Big Boy” Provision May Not Shield From Liability a Party that Actively Concealed Information

    On May 10, 2010, the Supreme Court of New York County declined to dismiss a complaint brought against Wachovia Capital Markets, LLC d/b/a Wachovia Securities (Wachovia), accounting firm BDO Seidman, LLP, and others for their part in allegedly assisting the massive fraud committed by Le Nature’s, Inc.  Le Nature’s collapsed after taking out $285 million in loans arranged and syndicated by Wachovia from the Plaintiffs, hedge fund manager Harbinger Capital Partners, other hedge fund managers and banks.  The Plaintiffs aim to hold Wachovia liable for its alleged misrepresentations when it induced their investment, notwithstanding the existence of a “Big Boy” provision, or a specific disclaimer of reliance, in their credit agreement.  (For more on “Big Boy” provisions, see “New York State Court Upholds ‘Big Boy’ Provisions and Dismisses Majority of MBIA’s Claims Against Merrill Lynch Relating to CDS Protection Sold by MBIA Referencing CDOs Issued by Merrill,” The Hedge Fund Law Report, Vol. 3, No. 17 (Apr. 30, 2010); “Big Boys Don’t Cry: How ‘Big Boy’ Provisions Can Help Hedge Fund Managers Avoid Liability for Insider Trading Violations,” The Hedge Fund Law Report, Vol. 2, No. 48 (Dec. 3, 2009); “When Do Hedge Fund Managers Have a Duty to Disclose Material, Nonpublic Information?,” The Hedge Fund Law Report, Vol. 2, No. 46 (Nov. 19, 2009).)  The Trial Court found that the Plaintiffs’ allegations survived the pleading stage because, accepting their allegations as true, Wachovia “actively prevented any possibility that lenders could have discovered Le Nature’s’ true financial condition by . . . fronting Le Nature’s interest payments” to pre-existing lenders in order to conceal from the Plaintiffs Le Nature’s inability to timely make those interest payments.  Thus, the Court held, even though the sophisticated investors had broad access to Le Nature’s books, the Court could not determine whether the investors “could not have ascertained” Le Nature’s true financial condition “by exercising reasonable diligence” on the existing record.  We detail the background of the action and the Court’s legal analysis.

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  • From Vol. 3 No.17 (Apr. 30, 2010)

    New York State Court Upholds “Big Boy” Provisions and Dismisses Majority of MBIA’s Claims Against Merrill Lynch Relating to CDS Protection Sold by MBIA Referencing CDOs Issued by Merrill

    On April 7, 2010, a New York State trial court dismissed most of the claims brought by MBIA Insurance Corporation (MBIA) and its affiliate against Merrill Lynch & Co. (now owned by Bank of America), over losses the bond insurer incurred guaranteeing credit default swaps (CDSs or swaps) referencing collateralized debt obligations (CDOs) issued by Merrill Lynch.  MBIA had brought the lawsuit just under one year ago, claiming that Merrill Lynch’s effort to market the CDOs was part of a deliberate scheme to “offload billions of dollars in deteriorating U.S. subprime mortgages and other collateral that [it] held on its books by packaging them into [ ] CDOs or hedging their exposure through swaps with insurers.”  Because MBIA and its affiliate contractually disclaimed reliance on any representations by Merrill Lynch as to the quality of those CDOs, the court dismissed their causes of action for fraud in the inducement, fraud by omission and negligent misrepresentation without regard to the truth of their accusations.  However, the court allowed MBIA to proceed with one cause of action, a claim for breach of contract on the theory that Merrill Lynch had promised to deliver securities of “AAA” credit rating quality, but had failed to do so when it delivered securities which had received but did not deserve such a rating.  This article summarizes the background of MBIA’s action and the court’s legal opinion.

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  • From Vol. 2 No.48 (Dec. 3, 2009)

    Big Boys Don’t Cry: How “Big Boy” Provisions Can Help Hedge Fund Managers Avoid Liability for Insider Trading Violations

    Various factors recently have increased the sensitivity of hedge fund managers, lawyers, compliance professionals, investors and others to insider trading concerns.  Those factors include, but are not limited to: insider trading allegations against Galleon Group founder Raj Rajaratnam and others; remarks delivered by SEC Enforcement Division Director Robert Khuzami on November 23 indicating that the Division will increase its enforcement activity with respect to insider trading by hedge funds, and in particular will focus on insider trading in the derivatives context; and press reports that the SEC has sent at least three dozen subpoenas to hedge fund managers and broker-dealers during November 2009 relating to communications in connection with healthcare industry transactions closed during the past three years and certain retail industry transactions.  See “For Hedge Fund Managers in a Heightened Enforcement Environment, Internal Investigations Can Help Prevent or Mitigate Criminal and Civil Charges,” The Hedge Fund Law Report, Vol. 2, No. 47 (Nov. 25, 2009).  In light of the increased regulatory scrutiny of activity that may constitute insider trading, hedge fund lawyers, compliance professionals and others are re-examining how and where to draw the line between permissible and impermissible information, and how to police that line effectively.  See “How Can Hedge Fund Managers Distinguish Between Market Color and Inside Information?,” The Hedge Fund Law Report, Vol. 2, No. 46 (Nov. 19, 2009); “How Can Hedge Fund Managers Talk to Corporate Insiders Without Violating Applicable Insider Trading Laws?,” The Hedge Fund Law Report, Vol. 2, No. 43 (Oct. 29, 2009).  In addition, hedge fund industry participants are refocusing on the promise and limits of tools they may employ to prevent or mitigate allegations of trading on material, nonpublic information.  One such tool is the so-called “Big Boy” provision, or disclaimer of reliance.  In our November 19, 2009 issue, we published the first part of a two-part analysis of Big Boy provisions in the hedge fund context by Brian S. Fraser and Tamala E. Newbold, Partner and Staff Attorney, respectively, at Richards Kibbe & Orbe LLP.  That first part discussed the duty to disclose material, nonpublic information (or refrain from trading) and the differences between the federal securities laws and New York common law on that issue, in particular, the “superior knowledge” trigger for the duty to disclose under New York law which has no federal counterpart.  See “When Do Hedge Fund Managers Have a Duty to Disclose Material, Nonpublic Information?,” The Hedge Fund Law Report, Vol. 2, No. 46 (Nov. 19, 2009).  This second part expands on that analysis, focusing in depth on the enforceability of Big Boy provisions in securities and non-securities transactions, with a special emphasis on the enforceability of such provisions under New York law in the context of trading in bank loans.  In addition, this part includes a detailed discussion of, and a comprehensive review of the caselaw relating to, specific steps that hedge fund managers can take to increase the likelihood that a court will enforce a Big Boy provision.

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  • From Vol. 2 No.46 (Nov. 19, 2009)

    When Do Hedge Fund Managers Have a Duty to Disclose Material, Nonpublic Information?

    For hedge fund lawyers and compliance professionals who are charged with protecting their institutions from allegations of trading on material, nonpublic information, “Big Boy” provisions, or disclaimers of reliance, are potentially helpful tools.  In the first of a two-part series of guest articles, Brian S. Fraser and Tamala E. Newbold, Partner and Staff Attorney, respectively, at Richards Kibbe & Orbe LLP, discuss the duty to disclose material, nonpublic information (or refrain from trading) and the differences between the Federal securities laws and New York common law on that issue, in particular, the “superior knowledge” trigger for the duty to disclose under New York law which has no Federal counterpart.  The second article in this series will focus on the usefulness of Big Boy provisions in securities and non-securities transactions and steps that will increase the likelihood a court will enforce a Big Boy provision; the discussion of New York law in that second article will focus on its application in secondary market bank loan transactions.

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