The Hedge Fund Law Report

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

Articles By Topic

By Topic: Internal Investigations

  • From Vol. 10 No.12 (Mar. 23, 2017)

    Protecting Attorney-Client Privilege and Attorney Work Product While Cooperating With the Government: Establishing Privilege and Work Product in an Investigation (Part One of Three)

    Guarding attorney-client privileged communications and attorney work product are often important objectives, particularly for fund managers conducting internal investigations while simultaneously cooperating with the government. The privilege and, to a lesser extent, the work product doctrine generally require confidentiality, which can be contrary to the disclosure required when cooperating with the DOJ or the SEC’s Enforcement Division. In a three-part guest series, Eric J. Gorman and Brooke A. Winterhalter, partner and associate, respectively, at Skadden, examine the interplay between the attorney-client privilege and attorney work product protection, on the one hand, and cooperation with the government, on the other. This first article in the series addresses how and when the attorney-client privilege and attorney work product protection are created during internal investigations, and steps that can be taken to establish and maintain those protections. The second article will analyze what investigation materials can be shared with the government without implicating the privilege or attorney work product protection, and what steps can be taken to help preserve these protections if applicable documents are shared, intentionally or otherwise, with the government. The third article will provide an overview of when and how privileged or protected investigation materials that have been shared with the government can be protected from discovery in collateral litigation. For more on internal investigations, see “D.C. Circuit Confirms Applicability of Attorney-Client Privilege to Internal Investigations” (Aug. 7, 2014); and “For Hedge Fund Managers in a Heightened Enforcement Environment, Internal Investigations Can Help Prevent or Mitigate Criminal and Civil Charges” (Nov. 25, 2009).

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  • From Vol. 8 No.20 (May 21, 2015)

    How Hedge Fund Managers Can Protect Privileged Internal Investigations Without Violating SEC Whistleblower Rule 21F-17

    The protection of whistleblowers is a priority for the SEC.  As hedge fund managers are subject to sanctions for retaliating against whistleblowers, it is important for managers to ensure that internal investigations are properly carried out and that internal reporting is properly incentivized.  See “Sanctions against Private Fund Manager for Retaliating against Whistleblower Highlight the Importance of Incentivizing Internal Reporting,” The Hedge Fund Law Report, Vol. 7, No. 27 (Jul. 18, 2014).  Furthermore, with the addition in 2010 by the Dodd-Frank Act of Section 21F – the “Securities Whistleblower Incentives and Protection” provision – to the Securities and Exchange Act of 1934, and the SEC’s subsequent adoption of Rule 21F-17 to implement Section 21F’s whistleblower protections in 2011, hedge fund managers have been put on notice that the actual or threatened enforcement of confidentiality agreements could result in violations of the Rule.  On April 1, 2015, in connection with charges that KBR, Inc. violated Rule 21F-17, the SEC announced its “first enforcement action against a company for using improperly restrictive language in confidentiality agreements with the potential to stifle the whistleblowing process.”  In a guest article, Thomas K. Cauley, Jr., Courtney A. Rosen and William B. Bruce, of Sidley Austin, analyze the SEC enforcement action against KBR and recommend how hedge fund managers and other entities can tailor their confidentiality agreements to avoid violating Rule 21F-17(a), while at the same time preserving attorney-client privilege during internal investigations.  For more on whistleblowers, see “RCA Session Offers Insights on Dodd-Frank Whistleblower Regime, Incentives, Anti-Retaliation Protections and Risks,” The Hedge Fund Law Report, Vol. 8, No. 14 (Apr. 9, 2015).  For additional insight from Cauley and Rosen, see “Rules Against ‘Spoofing’ and Other Disruptive Trading in Futures, Swaps and Options,” The Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014); “Derivative Actions and Books and Records Demands Involving Hedge Funds,” The Hedge Fund Law Report, Vol. 7, No. 39 (Oct. 17, 2014); and “Contractual Provisions That Matter in Litigation between a Fund Manager and an Investor,” The Hedge Fund Law Report, Vol. 7, No. 37 (Oct. 2, 2014).

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  • From Vol. 7 No.30 (Aug. 7, 2014)

    D.C. Circuit Confirms Applicability of Attorney-Client Privilege to Internal Investigations

    A March 2014 decision by the U.S. District Court for the District of Columbia sent shock waves through the ranks of corporate counsel: The District Court ruled that an internal investigation was not privileged because it would have been conducted regardless of whether the company was also seeking legal advice.  See “When Are Reports of Internal Investigations Protected by Attorney-Client Privilege?,” The FCPA Report, Vol. 3, No. 9 (Apr. 30, 2014).  In an important reaffirmation of the strength and breadth of the attorney-client privilege, the U.S. Court of Appeals for the D.C. Circuit recently vacated the District Court’s decision, ruling that the privilege was available so long as seeking legal advice was a “significant” purpose – even if not the sole purpose – of the internal investigation.  See also “Federal Court Decision Narrows the Scope of Attorney-Client Privilege Available to Hedge Fund Managers in Internal Investigations,” The Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).

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  • From Vol. 7 No.13 (Apr. 4, 2014)

    How Can Hedge Fund Managers Reconcile Effective Monitoring of Electronic Communications with Employees’ Privacy Rights? (Part One of Three)

    Information is the raw material out of which hedge fund managers fashion their finished products – compelling investment ideas and, one hopes, absolute returns.  As such, managers and their personnel are continuously engaged in collecting, refining and transmitting information, that is, communicating.  Today, the vast majority of such communications occur electronically – via e-mail, chat, text, social media and similar channels.  From an investment perspective, this increases opportunities but at the same time competition.  From a compliance perspective, the proliferation of electronic communications has dramatically expanded the range of opportunities for legal and regulatory violations.  Hedge fund managers are not unique among businesses in contending with the compliance challenges raised by electronic communications, but many of the specific compliance challenges faced by hedge fund managers are industry-specific.  Accordingly, The Hedge Fund Law Report is undertaking a three-part series intended to identify the specific compliance challenges for hedge fund managers raised by electronic communications and to outline best practices for surmounting those challenges.  This article – the first in the series – catalogues six reasons why hedge fund managers need to monitor electronic communications of employees and highlights two settings in which procedures other than electronic communication monitoring are most effective.  Subsequent articles in the series will discuss the sources of employees’ privacy rights, factors bearing on the reasonableness of an employee’s expectation of privacy, the benefits and limits of specific policies regarding electronic communication monitoring and best practices in this area.  See also “Key Elements of Electronic Communications Policies and Procedures for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 3, No. 44 (Nov. 12, 2010).

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  • From Vol. 7 No.3 (Jan. 23, 2014)

    Federal Court Decision Narrows the Scope of Attorney-Client Privilege Available to Hedge Fund Managers in Internal Investigations

    A recent federal court decision limited the application of the “selective waiver” doctrine of attorney-client privilege and work product protection in internal investigations conducted by hedge fund managers.  See “Six Recommendations for Hedge Fund Managers Seeking to Protect Themselves from Waiver of Attorney-Client Privilege When Faced With SEC Document Requests,” The Hedge Fund Law Report, Vol. 6, No. 3 (Jan. 17, 2013).  This article discusses the factual background of the case, related court decisions and the court’s legal analysis.  This article also restates the salient points from a law firm memorandum on how the decision should inform the approach of hedge fund managers to internal investigations and interactions with regulators.  For more on preserving privilege during internal investigations, see “Ten Recommendations to Help Hedge Fund Managers Conduct Successful Internal Investigations,” The Hedge Fund Law Report, Vol. 6, No. 9 (Feb. 28, 2013).

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  • From Vol. 6 No.9 (Feb. 28, 2013)

    Ten Recommendations to Help Hedge Fund Managers Conduct Successful Internal Investigations

    Hedge fund managers should demonstrate a vigorous commitment to preventing and detecting securities law violations, especially in an environment with increasing SEC enforcement activity and heightened fund investor due diligence of managers.  See “OCIE Director Carlo di Florio and Asset Management Unit Chief Bruce Karpati Address Examinations and Enforcement Priorities for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).  Therefore, at the first signs of red flags, a hedge fund manager must strongly consider whether to initiate an internal investigation, which can facilitate the accomplishment of various goals, including potentially deterring any nefarious activity; demonstrating the firm’s independent commitment to good compliance; and, if the wrongdoing has already occurred, preventing or mitigating any charges that could be brought against the manager.  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).  However, if not conducted properly, internal investigations can present their own risks, including inadvertent disclosure of the investigation; waiver of the attorney-client privilege; and accusations of improper handling or even obstruction of justice.  To mitigate these risks, hedge fund managers should adopt a carefully-conceived plan for conducting internal investigations.  In a guest article, Sung-Hee Suh and Nelida Lara, partner and associate, respectively, at Schulte Roth & Zabel LLP, offer ten recommendations designed to help hedge fund managers conduct successful internal investigations.

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  • From Vol. 5 No.4 (Jan. 26, 2012)

    SEC Files Civil Insider Trading Complaint Against Diamondback Capital Management, Level Global Investors and Seven Individuals Based on Trading in Dell and Nvidia; Diamondback Strikes Non-Prosecution Deal with U.S. Department of Justice and Settles with the SEC for $9 Million

    The Securities and Exchange Commission (SEC) has continued its push to root out insider trading in the hedge fund industry by leveling charges against two prominent hedge fund managers, certain of their respective principals and a network of analysts who allegedly shared inside information about Dell and Nvidia.  This article details the SEC’s allegations and summarizes the status of the related criminal charges and recent developments.

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  • From Vol. 4 No.36 (Oct. 13, 2011)

    SEC Enforcement Action Against a Private Equity Fund Manager Partner Calls into Question the Value of Self-Reporting in the Private Funds Context

    The SEC recently brought an enforcement action against a partner of a private equity fund manager for allegedly usurping investment opportunities that belonged – under fiduciary duty principles and fund and manager documents – to the manager’s funds.  According to the order in the matter (Order), the manager had robust compliance policies and procedures in place, conducted an internal investigation and self-reported the partner’s alleged bad acts to the SEC.  The Enforcement Division brought an action against the partner, but did not name the firm itself in the action.  From the perspective of the manager, the fact that it was not named is a good thing, but the fact of the action itself is a bad thing.  For other private fund managers contemplating self-reporting, the important question raised by this matter is the extent to which self-reporting dissuaded the SEC from charging the manager in addition to the partner.  In an effort to answer that question – or at least to refine and particularize it – this article describes the factual and legal allegations in the Order, then discusses the implications of the matter for hedge and private equity fund managers.

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  • From Vol. 4 No.28 (Aug. 19, 2011)

    U.S. District Court Rules on Whether Attorney Interview Notes and Summaries Produced in Connection with Hedge Fund Manager D.B. Zwirn’s Internal Investigation of Financial Irregularities Are Protected from Disclosure by Attorney-Client Privilege

    In early 2006, now-defunct hedge fund managers D.B. Zwirn & Co., L.P. and D.B. Zwirn Partners, LLC (Zwirn) learned of certain financial irregularities in their operations, including unauthorized early payment of management fees and the purchase of a Gulfstream jet for use by their founder and principal, Daniel B. Zwirn.  See “Ten Steps That Hedge Fund Managers Can Take to Avoid Improper Transfers among Funds and Accounts,” The Hedge Fund Law Report, Vol. 4, No. 13 (April 21, 2011).  The Zwirn companies retained the services of three different law firms – Schulte, Roth & Zabel, LLP (SRZ); Gibson, Dunn & Crutcher, LLP (GDC); and Fried, Frank, Harris, Shriver & Jacobson LLP – to investigate the irregularities and defend any legal actions arising from them.  The investigations placed blame on plaintiff Perry A. Gruss (Gruss), who was Chief Financial Officer and a partner of certain Zwirn entities.  Gruss resigned.  Zwirn then communicated its attorneys’ findings to its investors and to the Securities and Exchange Commission (SEC).  In response, Gruss sued Zwirn for defamation in U.S. District Court.  During discovery, Gruss moved to compel disclosure of the interview notes and summaries prepared by SRZ and GDC attorneys in the course of their investigations.  This article discusses the District Court’s ruling on Gruss’ motion, as well as the Court’s analysis of the attorney-client privilege and the related work product doctrine in the hedge fund context.  For a summary of Gruss’ complaint, see “Former CFO of Highbridge/Zwirn Special Opportunity Fund Sues Ex-Partner Daniel B. Zwirn for Defamation and Breach of Contract,” The Hedge Fund Law Report, Vol. 2, No. 30 (July 29, 2009).

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  • From Vol. 2 No.47 (Nov. 25, 2009)

    For Hedge Fund Managers in a Heightened Enforcement Environment, Internal Investigations Can Help Prevent or Mitigate Criminal and Civil Charges

    In the public company context, internal investigations have become an accepted and expected adjunct of good corporate governance.  In response to even the remotest whiff of a violation of law, regulation or internal policy, prudent public company managers generally initiate a thorough investigation with the twin goals of fact-finding and precluding or mitigating civil or criminal charges.  As responses by some notable hedge fund managers to the Galleon allegations have demonstrated, the purposes, goals and many of the techniques of internal investigations developed in the public company context apply, albeit with some variation, in the hedge fund world.  That is, for hedge fund managers whose current or former principals or employees have been or may be charged with civil or criminal violations, or may simply be in the zone of suspicion, an internal investigation can uncover relevant evidence, identify the absence of evidence and can credibly demonstrate to regulators and prosecutors that the hedge fund manager has an independent commitment to compliance and thus does not require any external prodding in that regard.  In light of the explicitly stated plan on the part of the SEC’s Enforcement Division to step up enforcement of insider trading laws and regulations applicable to hedge fund managers, internal investigations are expected to become a more standard aspect of hedge fund legal and operational practice.  However, hedge fund managers as a group have a relatively short track record with internal investigations, at least compared to public company managers, and internal investigations in the hedge fund context raise specific concerns.  Accordingly, this article seeks to acquaint hedge fund industry participants with the primary issues to be considered when initiating and conducting an internal investigation, and in doing so discusses: recent examples of internal investigations initiated by operating companies and hedge fund managers in response to the Galleon allegations; the eight most common contexts in which a hedge fund manager may consider initiating an internal investigation; the purpose of an internal investigation; when and how to define the scope of an internal investigation; whether the fact and any findings of an investigation must be disclosed; retention of documents and records; whether an investigation should be conducted by internal personnel or outside law and accounting firms; who outside counsel represents; whether or not an investigation report should be written; and what to do if the investigation uncovers a violation.

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