The Hedge Fund Law Report

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

Articles By Topic

By Topic: Energy

  • From Vol. 9 No.1 (Jan. 7, 2016)

    CFTC Resolves Its First Insider Trading Case

    The CFTC recently settled its first enforcement proceeding involving alleged insider trading in commodities futures. Although there have been previous cases alleging insider trading of products traditionally thought of as futures or commodities, such as credit default swaps, these actions have been brought by the SEC. See, e.g., “After Bench Trial of First-Ever Credit Default Swap Insider Trading Action, U.S. District Court Rules That Swaps Referencing Bonds Are Securities-Based Swap Agreements Under Antifraud Provisions of Securities Exchange Act, but Holds That SEC Failed to Prove Insider Trading” (Jul. 8, 2010). A proprietary trader employed by a large public company surreptitiously, and in violation of company policy, matched company trades in oil and gas futures with trades in two accounts that he personally controlled. He also traded for his own account ahead of his trades for the company. The CFTC accused the trader of violating the antifraud and anti-manipulation provisions of the Commodity Exchange Act and its rules. Of particular note to any hedge fund manager engaging in transactions involving commodity interests (including futures, options on futures and related swaps), the CFTC has firmly asserted that its Regulation 180.1 – which closely tracks Rule 10b-5 under the Securities Exchange Act of 1934 – permits the CFTC to prosecute commodities industry participants for insider trading. This article summarizes the CFTC’s allegations; the relevant laws and regulations; and the outcome of the settlement. For more on CFTC enforcement priorities, see “Regulators From the SEC, CFTC and New York Attorney General’s Office Reveal Top Hedge Fund Enforcement Priorities (Part Two of Four)” (Dec. 18, 2014).

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  • From Vol. 8 No.11 (Mar. 19, 2015)

    Structuring Private Funds to Profit from the Oil Price Decline: Due Diligence, Liquidity Management and Investment Options

    Energy companies directly or indirectly reliant on reserve based lending and public equity markets are feeling pressure as markets have tightened, as evidenced by recent significant stock declines, IPO delays, dividend and distribution cuts and missed interest payments leading to bankruptcy filings.  If lower prices are sustained, this financial pressure will continue over time as reserves are increasingly valued at lower prices, interest rates move upward and poorly hedged exploration and production companies and counterparties face unfavorable positions.  In such a market, leveraged and shale focused high-yield exploration and production companies, shale-reliant and undiversified oil field services companies and small- to medium-sized financial institutions with significant exposure to such companies and the boom oil patch areas generally will present distressed investors with plenty of opportunities to extract value from current market conditions.  Along with the financial considerations, investment funds looking to take advantage of distressed energy opportunities will have to consider various legal matters including structuring the investments, due diligence and dealing with potentially illiquid positions.  This guest article describes the market context, focusing on opportunities for hedge funds and other players arising out of the oil price plunge; the palette of investment options available to managers looking to invest in or around oil price movements; the balance between speed and comprehensiveness in due diligence; and tax, liquidity and other fund structuring considerations.  The authors of this article are James Deeken and Shubi Arora, both partners at Akin Gump Strauss Hauer & Feld; Jhett Nelson, counsel at Akin; and Stephen Harrington, an Akin associate.

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  • From Vol. 4 No.43 (Dec. 1, 2011)

    Motion for Appointment of an Examiner in Dynegy Bankruptcy Illustrates the Divergence of Interests of Investors in Equity and Debt of the Same Issuer Group

    In the latest round of sparring between holders of bonds guaranteed by bankrupt defendant Dynegy Holdings LLC (Dynegy Holdings) and Dynegy’s equity holders, the indenture trustee for those bonds has moved that the Bankruptcy Court appoint an examiner to review the circumstances under which Dynegy sold its profitable coal-fired power plants to its parent company, Dynegy Inc., shortly before Dynegy Holdings filed for Chapter 11 protection.  Dynegy Inc. is not in bankruptcy and its shareholders stand to benefit from the deal at the expense of Dynegy Holdings’ bondholders.  The indenture trustee alleges, among other things, that the sale of assets was for less than fair value, involved self-dealing by Dynegy directors and was structured to frustrate the bondholders’ efforts to challenge the deal.  This article summarizes the bondholders’ allegations and legal arguments.  More generally, the motion illustrates one of the many fact patterns in which interests of holders of equity and debt of the same issuer group may diverge in a bankruptcy.  Hedge funds often get involved in distressed situations at different levels of the capital structure, and this article helps clarify the relative strengths and weaknesses of equity versus debt.  More generally, this article demonstrates that court decisions can affect investment outcomes in distressed investing as or more powerfully than economic fundamentals.  Given the unpredictability of legal outcomes, distressed investing – whether via debt, equity or something else – may offer a genuinely uncorrelated investment opportunity, which is increasingly rare in this era when debt, equity and even some commodity markets are moving in unison, all with an eye on Europe.  See “The Impact of Asymmetric Information, Trade Documentation, Form of Transfer and Additional Terms of Trade on Hedge Funds’ Trade Risk in European Secondary Loans (Part Two of Two),” The Hedge Fund Law Report, Vol. 4, No. 38 (Oct. 27, 2011).

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  • From Vol. 4 No.34 (Sep. 29, 2011)

    In Continuing Battles Involving Creditors of Dynegy, Delaware Chancery Court Refuses to Enjoin Transfer of Power Plants from Existing Dynegy Subsidiaries to New “Bankruptcy-Remote” Subsidiaries

    Plaintiffs in this action are the owners of four unprofitable power plants that are leased to subsidiaries of Defendant electricity producer Dynegy Holdings Inc. (Dynegy) under long-term leveraged leases.  Dynegy is the guarantor of those leases.  As one step in an unfolding plan to reorganize and restructure its outstanding debt, in July 2011, Dynegy announced that it was moving most of its power plants – but not Plaintiffs’ plants – from existing subsidiaries into new “bankruptcy-remote” subsidiaries.  Plaintiffs believed that the move would weaken the credit support for those leases.  After negotiations with Dynegy failed, Plaintiffs commenced an action seeking to enjoin Dynegy from proceeding with the restructuring.  They alleged that the transfer would violate the terms of the Dynegy guarantee and constituted a fraudulent conveyance under Delaware law.  The Delaware Court of Chancery denied their motion in its entirety.  We detail the legal analysis that led the Court to its decision.  For a related discussion of regulatory issues affecting hedge funds that trade in the debt of merchant power projects, see “Merchant Power Regulatory Roulette,” The Hedge Fund Law Report, Vol. 4, No. 33 (Sep. 22, 2011).

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  • From Vol. 4 No.33 (Sep. 22, 2011)

    Merchant Power Regulatory Roulette

    Billions of dollars of merchant power debt tied to aging, largely coal-fired, power plants is subject to escalating financial stress and attracting increasing attention from hedge fund investors.  Recent public examples include Energy Future Holdings (TXU), EME Homer City and Astoria Generating.  To a large extent, current merchant power economics and future prospects are driven by overall power demand and natural gas prices insofar as natural gas plants currently have a price advantage in many competitive power pools they have not previously enjoyed.  Thus, investment decisions regarding debt related to coal-fired merchant plants will certainly be influenced by the investor’s view as to the persistence of low-cost natural gas as well as future demand recovery.  However, the value prospects for coal-fired and other legacy plants is also being significantly impacted by certain impending, highly contested and still spinning regulatory actions, and it is critical that hedge fund managers consider this regulatory roulette in their merchant power debt investment decisions.  In a guest article, Howard L. Siegel, a partner at Brown Rudnick LLP, where he is a member of the firm’s Bankruptcy and Corporate Restructuring Group and its Energy, Utilities and Environmental Practice Group, analyzes the key regulatory considerations impacting the outcomes of investments by hedge funds in the debt of merchant power projects.

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