The Hedge Fund Law Report

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

Articles By Topic

By Topic: Short Sales

  • From Vol. 10 No.1 (Jan. 5, 2017)

    A Fund Manager’s Guide to Calculating and Reporting Short Sales Under European Regulations

    E.U. Regulation 236-2012 (Regulation), in effect since November 1, 2012, imposed reporting obligations on short sellers of E.U. securities and regulated certain aspects of the credit default swap market. Compliance, however, is difficult due to a lack of available guidance on those reporting requirements. To help clarify these obligations for fund managers, a recent program presented by Advise Technologies (Advise) offered a comprehensive overview of the Regulation, emphasizing the reporting requirements for short-sellers and the calculation of reporting thresholds. Moderated by William V. de Cordova, Editor-in-Chief of the HFLR, the program featured Anna Lawry, counsel at Ropes & Gray, and Marye Cherry, E.U. regulatory counsel at Advise. This article summarizes the panelists’ key insights. For more on the Regulation from Lawry and Cherry, see “How Fund Managers Can Navigate and Avoid the Pitfalls of European Short Sale Reporting Obligations” (Dec. 1, 2016). For a review of U.S. short-selling rules, see “Impact of Regulation SHO on the Short Sale Activity of Hedge Fund Managers and Broker-Dealers” (Nov. 10, 2011). For additional insight from Advise, see our two-part series on how non-E.U. hedge fund managers can comply with E.U. private placement regimes: “Registration” (Dec. 3, 2015); and “Reporting” (Dec. 10, 2015). 

    Read Full Article …
  • From Vol. 9 No.47 (Dec. 1, 2016)

    How Fund Managers Can Navigate and Avoid the Pitfalls of European Short Sale Reporting Obligations

    On November 1, 2012, E.U. Regulation 236/2012 (Regulation) came into effect, imposing reporting obligations on short sellers and regulating certain aspects of the credit default swaps market. In the wake of the 2008 global financial crisis, the primary goal of the Regulation is to provide E.U. regulators with sufficient transparency to ensure that member states are in a position to reduce systemic risk and financial instability related to short selling. See “Regulatory Uncertainty and Market Instability Put Short Selling Under Fire” (Dec. 3, 2008). Compliance with the Regulation has been difficult for many short sellers, however, as the regulators have provided little guidance in this area. For example, short sellers with potential notification obligations often lack a definitive source of information to confidently calculate their net short positions. To help distill some of the issues surrounding the Regulation, The Hedge Fund Law Report recently interviewed Anna Lawry, counsel at Ropes & Gray, and Marye Cherry, E.U. regulatory counsel at Advise Technologies (Advise). In this article, Lawry and Cherry review certain mechanics of the reporting obligations and identify several gaps in the Regulation that are important for short sellers. On Wednesday, December 7, 2016, from 10:00 a.m. to 11:00 a.m. EST, Lawry and Cherry will expand on the topics discussed below and other challenges relating to the Regulation in a webinar presented by Advise, entitled “E.U. Short Sale Reporting,” which will be moderated by William V. de Cordova, Editor-in-Chief of the HFLR. To register for the webinar, click here. For additional insight from Advise, see our two-part series on how non-E.U. hedge fund managers can comply with E.U. private placement regimes: “Registration” (Dec. 3, 2015); and “Reporting” (Dec. 10, 2015). 

    Read Full Article …
  • From Vol. 6 No.33 (Aug. 22, 2013)

    Important Implications and Recommendations for Hedge Fund Managers in the Aftermath of the SEC’s Settlement with Philip A. Falcone and Harbinger Entities

    A new era in SEC enforcement has begun.  On August 19, 2013, Philip A. Falcone, Harbinger Capital Partners LLC (Harbinger) and other Harbinger entities agreed to a consent settling SEC charges.  The charges related to: (1) an improper loan effected between Falcone and the Harbinger Capital Partners Special Situations Fund; (2) improper arrangements between Falcone, Harbinger Capital Partners Fund I and various large fund investors that provided such investors with undisclosed preferential redemption terms; and (3) improper trading in the distressed high yield bonds issued by Canadian manufacturing company MAAX Holdings, Inc.  The groundbreaking settlement affirms the SEC’s commitment to extracting admissions of wrongdoing as a condition of settlement in select cases involving egregious conduct or significant harm to investors, which stands in direct contrast to its previous policy of allowing defendants to “neither admit nor deny the charges” in settlement agreements.  The settlement has broad implications for hedge fund managers, and it behooves such managers to understand how to address such issues.  This article describes the facts as admitted by the defendants; outlines the sanctions agreed to by the defendants; highlights important issues that hedge fund managers must address in light of the settlement agreement and the SEC’s new settlement policy; and provides practical recommendations for addressing such issues.  For a discussion of the SEC’s enforcement action initiated against the defendants, see “SEC Charges Philip A. Falcone, Harbinger Capital Partners and Related Entities and Individuals with Misappropriation of Client Assets, Granting of Preferential Redemptions and Market Manipulation,” The Hedge Fund Law Report, Vol. 5, No. 26 (Jun. 28, 2012).

    Read Full Article …
  • From Vol. 6 No.26 (Jun. 27, 2013)

    PLI Panel Addresses Marketing and Brokerage Issues Impacting Hedge Fund Managers, Including Marketing to State Pension Plans, Capital Introduction and Broker Implications of In-House Marketing Activities

    At the Practising Law Institute’s Hedge Fund Compliance and Regulation 2013 program, an expert panel comprised of SEC attorneys and industry practitioners shared insights on topics involving marketing and brokerage issues that impact hedge fund managers.  Among other things, the wide-ranging discussion covered the regulatory perils that accompany marketing to government pension funds, including local, state and federal pay-to-play and lobbying laws; capital introduction programs; the European Union’s Alternative Investment Fund Managers Directive; broker regulations implicated by in-house fund marketing activities; and investment-related regulations impacting broker-dealers and their hedge fund clients, including the Market Access Rule, circuit breakers, the use of dark pools, short selling, securities lending and large trader reporting.  This article summarizes the highlights from the panel discussion that are most pertinent to hedge fund managers.  See also “PLI Panel Provides Regulator and Industry Perspectives on Ethical and Compliance Challenges Associated with Hedge Fund Investor Relations,” The Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013); “PLI Panel Provides Regulator and Industry Perspectives on SEC and NFA Examinations, Allocation of Form PF Expenses, Annual Compliance Review Reporting and NFA Bylaw 1101 Compliance,” The Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013).

    Read Full Article …
  • From Vol. 5 No.33 (Aug. 23, 2012)

    New York State Court Allows Hedge Funds to Proceed with Claims against Porsche for Fraud in Connection with Alleged Market Manipulation in Volkswagen Stock

    On August 8, 2012, the New York State Supreme Court (Court) allowed several hedge funds to proceed against Porsche Automobil Holding SE (Porsche) in a lawsuit claiming that they lost more than $1 billion in a massive short squeeze as a result of Porsche’s allegedly deceptive manipulation of the market for Volkswagen AG (VW) shares in 2008.  In allowing the hedge funds to proceed with discovery, the Court boosted the position of hedge funds and other investors seeking to recover for fraud in two important respects, both of which are discussed in this article.  More generally, this article summarizes the Court’s order, including the factual background of the case and the legal reasoning behind the decision.  For more on the legal principles at issue in the Porsche matter, see “Update, Are There Still Avenues for Recovery in United States for Overseas Hedge Fund Losses After Morrison v. National Bank Ltd.?,” The Hedge Fund Law Report, Vol. 3, No. 27 (Jul. 8, 2010).

    Read Full Article …
  • From Vol. 5 No.30 (Aug. 2, 2012)

    How Far Can Hedge Fund Managers Go in Criticizing Public Companies?

    Hedge fund managers that make public comments about companies can face legal and regulatory risks.  Depending on the nature and scope of comments, regulators may determine that public comments by hedge fund managers may constitute market manipulation, which is prohibited by Section 9 of the Securities Act of 1933.  In addition, the public companies discussed by hedge fund managers may file defamation lawsuits against such managers.  This article discusses a recent court decision on the scope of permissible public statements by hedge fund managers about public companies.  This article is particularly relevant to hedge fund managers whose funds hold short positions in public equity.

    Read Full Article …
  • From Vol. 4 No.40 (Nov. 10, 2011)

    Impact of Regulation SHO on the Short Sale Activity of Hedge Fund Managers and Broker-Dealers

    On October 25, 2011, The Financial Industry Regulatory Authority (FINRA) announced that it fined UBS Securities LLC (UBS) $12 million for violations of Regulation SHO (Reg SHO) and related failures in supervising short sales.  In general terms, FINRA found that, over a substantial period, UBS: (1) placed short sale orders to the market without the required “locates”; (2) mismarked sale orders including labeling short sales as “long”; and (3) misrepresented its aggregation units in a way that may have further produced failures to locate and mismarking.  Moreover, FINRA found that UBS had insufficient supervisory and monitoring procedures in place to either prevent or detect these violations.  FINRA’s charging document provides one of the most comprehensive recent analyses of Reg SHO in practice.  The document provides important insight into FINRA’s expectations with respect to a broker-dealers’ compliance obligations in connection with short sales.  And by extension, FINRA’s analysis is relevant to hedge funds because, as discussed in this article, Reg SHO affects hedge funds and hedge fund managers directly and indirectly (via their use of prime brokers).  Accordingly, the background and analysis in this article are important for hedge fund managers for whom short sales are part of an investment strategy.

    Read Full Article …
  • From Vol. 4 No.15 (May 6, 2011)

    Federal Energy Regulatory Commission Upholds Administrative Law Judge Ruling that Imposes $30 Million Penalty on Former Amaranth Trader Brian Hunter for Natural Gas Market Manipulation During 2006

    Defendant Brian Hunter (Hunter) was an executive and head natural gas trader at hedge fund manager Amaranth Advisors, LLC (Amaranth).  The Federal Energy Regulatory Commission (FERC), which has jurisdiction over interstate sales of natural gas and electricity, has upheld in all respects the findings of a FERC administrative law judge who found Hunter guilty of manipulation of the natural gas market and imposed a $30 million penalty on him.  At the end of February, March and April 2006, Hunter sold large volumes of natural gas futures contracts on their expiration dates in order to drive down the settlement prices of those contracts.  Gas futures contracts trade on the New York Mercantile Exchange (NYMEX).  FERC argued that, unbeknownst to traders on the NYMEX, Hunter had amassed short positions in natural gas swap agreements that referenced the settlement prices of the gas futures contracts.  Consequently, he stood to profit from the drop in the settlement price of gas futures contracts that occurred when Amaranth dumped those contracts on their expiration dates.  Amaranth collapsed in late 2006, in large part because of the bets it had made on the natural gas market.  FERC determined that Hunter’s trading was intended to manipulate the price of natural gas futures contracts, was done knowingly and had an effect on the market for natural gas.  FERC bills this case as the “first fully litigated proceeding involving FERC’s enhanced enforcement authority under section 4A of the Natural Gas Act, which prohibits manipulation in connection with transactions subject to FERC jurisdiction.”  The trading at issue occurred only in the futures market, rather than in the physical gas market.  We summarize FERC’s decision.  See also “Federal District Court Dismisses Lawsuit Brought by San Diego County Employees Retirement Association against Hedge Fund Manager Amaranth Advisors and Related Parties for Securities Fraud, Gross Negligence and Breach of Fiduciary Duty,” The Hedge Fund Law Report, Vol. 3, No. 12 (Mar. 25, 2010).

    Read Full Article …
  • From Vol. 4 No.1 (Jan. 7, 2011)

    U.S. District Court Dismisses Hedge Funds’ Fraud Suit Against Porsche, Holding that Anti-Fraud Provisions of U.S. Securities Laws Do Not Apply to Swap Agreements that Reference Foreign-Traded Volkswagen Stock, Even If Those Agreements Were Made In the U.S. and Governed By U.S. Law

    Plaintiffs in this consolidated action are a number of domestic and offshore hedge funds that had taken significant short positions in the stock of Volkswagen AG (VW) during 2008.  Unbeknownst to those hedge funds, defendant Porsche Automobil Holding SE (Porsche) had quietly amassed, outright or through undisclosed options, the right to purchase over 75% of VW’s stock.  Porsche had never disclosed its intention to acquire such a large percentage of VW stock.  When Porsche eventually announced the true extent of its VW holdings, the plaintiff hedge funds were caught in a massive short squeeze and reportedly lost over $2 billion covering their short positions.  Both Porsche and VW are German corporations.  Although both corporations have ADRs available on U.S. exchanges, the funds achieved their short positions through securities-based swap agreements that referenced VW stock.  The funds sued Porsche and two of its executives in U.S. District Court for the Southern District of New York, claiming violations of the antifraud provisions of the Securities Exchange Act of 1934 and common law fraud.  Porsche and the individual defendants moved to dismiss the complaint for failure to state a claim upon which relief could be granted, arguing that U.S. securities laws did not apply to the swap transactions in question.  Relying on the U.S. Supreme Court’s recent decision in Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010), the District Court dismissed all federal fraud claims, holding that the U.S. securities laws were not intended to apply to transactions in foreign securities, even if one of the parties is based in the United States.  We summarize the Court’s decision.  For further discussion of the ability of U.S.-based hedge funds to sue foreign corporations in U.S. courts for violations of the antifraud provisions of the U.S. securities laws, see “Are There Avenues for Recovery in United States Courts for Overseas Hedge Fund Losses?,” The Hedge Fund Law Report, Vol. 2, No. 29 (Jul. 23, 2009); “Update: Are There Still Avenues for Recovery in United States Courts for Overseas Hedge Fund Losses After Morrison v. National Australia Bank Ltd.?,” The Hedge Fund Law Report, Vol. 3, No. 27 (Jul. 8, 2010).

    Read Full Article …
  • From Vol. 3 No.5 (Feb. 4, 2010)

    Hedge Fund Holders of Short Positions in Volkswagen Sue Porsche and Two Top Executives for Fraud for Allegedly Lying about Porsche’s Intention to Take over Volkswagen and Allegedly Manipulating the Supply of Porsche Stock

    On October 26, 2008, Porsche Automobil Holding SE (Porsche), a European public company and German automobile manufacturer, announced that it owned directly, or had the right under cash-settled options to purchase, 74.1% of Volkswagen’s stock.  Plaintiffs are a group of hedge funds that held short positions in Volkswagen AG (VW) stock on that date.  VW’s stock price immediately rose on the Porsche announcement.  By the time Porsche went public with its VW holdings, plaintiffs’ short positions equaled more than 13% of VW’s outstanding shares.  Because the German State of Lower Saxony controlled more than 20% of VW, only about 6% of VW shares were available for purchase on the open market to cover the plaintiffs’ short positions.  A dramatic “short squeeze” ensued as plaintiffs scrambled to cover their short positions.  VW’s stock price soared from around 200 Euros per share prior to the Porsche announcement to over 1,000 Euros per share at the height of the squeeze on October 28, 2008.  Plaintiffs allege that, from as early as February 2008, Porsche lied and manipulated the market in a covert effort to accumulate sufficient options to take control of VW without paying a premium for control.  They claim that, had Porsche revealed its true intentions in the months prior to October 26, 2008, the price of VW stock would have begun to rise sooner and they would not have shorted VW stock at all or would have done so at higher prices.  They also allege that Porsche made billions in illicit profits by releasing some of its own VW shares for sale at the peak of the squeeze.  We summarize the hedge funds’ allegations and the events leading up to the dramatic October 2008 short squeeze.

    Read Full Article …
  • From Vol. 2 No.21 (May 27, 2009)

    SEC Study Finds Pre-Borrow Rule For Naked Short Sales Effective, but Costly

    On May 1, 2009, the Securities and Exchange Commission’s Office of Economic Analysis (OEA) published a summary of a study indicating that a pre-borrow requirement on naked short selling effectively curbs abuses, but also has the unintended effect of significantly increasing the costs of legitimate transactions.  We provide a detailed synopsis of the OEA’s summary of its study.

    Read Full Article …
  • From Vol. 2 No.13 (Apr. 2, 2009)

    Three Bills Before Congress Presage a Return of the Uptick Rule, Potentially Undermining Hedge Fund Strategies that Involve Short Sales of Equities

    On March 16, 2009, Senator Edward Kaufman (D-Delaware) introduced a bill in the Senate that, if enacted, would direct the SEC to take several actions aimed at (1) restoring the uptick rule that was in effect until July 5, 2007, and (2) addressing delivery and settlement issues that can arise in connection with short sales.  Two bills with similar goals have also been introduced into the House of Representatives in the 111th Congress; each has been referred to the Financial Services Committee.  We explain the mechanics of the three bills, the history of the uptick rule (including its implementation in 1938 and its withdrawal in 2007) and hedge fund industry responses to the latest legislative efforts regarding short selling.

    Read Full Article …
  • From Vol. 2 No.6 (Feb. 12, 2009)

    U.K. FSA Proposes to Require Disclosure of Short Positions in All U.K. Listed Stocks

    On February 6, 2009 the U.K. FSA issued Discussion Paper 09/01 proposing to require public disclosure of significant short positions in all U.K. listed stocks.  This proposed disclosure requirement follows a decision by the FSA on January 14, 2009 to extend to June 30, 2009 a requirement (originally imposed by the FSA on September 18, 2008) to publicly disclose significant short positions in U.K. financial sector companies.  Also on January 14, 2009, the FSA decided to let expire on January 16, 2009 a ban on the active creation or increase of net short positions in the stocks of U.K. financial sector companies.  We detail the background of the FSA’s recent activity with respect to disclosure of short positions, with special focus on the FSA’s evolving treatment of contracts for difference.

    Read Full Article …
  • From Vol. 1 No.28 (Dec. 16, 2008)

    The Freedom of Information Act: A Crack in the Confidentiality of Disclosed Short Sale Data?

    The SEC’s temporary rule requiring certain institutional investment managers to file weekly reports disclosing their short sales and short positions has raised concern among affected parties, especially hedge funds, that public disclosure of this information may undermine trading strategies.  Hedge funds have taken some comfort in a move by the SEC to limit the rule so that disclosure only goes to the agency, and not to the public.  But there may be an exception to the no-public-disclosure rule that can undermine managers’ confidence in the confidentiality of disclosed short information: requests under the Freedom of Information Act.  We explain the application of the Freedom of Information Act in the short sale reporting context.

    Read Full Article …
  • From Vol. 1 No.27 (Dec. 9, 2008)

    Revised Short Sale Reporting Requirements May Still Go Too Far

    As part of its continued effort to monitor and understand short selling, the SEC decided in October to extend until August 1, 2009 short sale and position reporting requirements first enacted in an emergency order issued on September 18.  The agency intends to use the information in reports to craft and evaluate regulation.  Hedge funds, however, have been nearly unanimous in their opposition to short reporting.  In this second part of a two-part series, we explain the background, content and practical implications of the new short sale rules, and the likely future course of rulemaking on the topic.

    Read Full Article …
  • From Vol. 1 No.26 (Dec. 3, 2008)

    Regulatory Uncertainty and Market Instability Put Short Selling Under Fire

    An uncertain regulatory environment and unstable market conditions are seriously curtailing the ability of hedge fund managers to successfully pursue short selling strategies – a key risk-mitigation and alpha-generating tool – putting additional pressure on an industry already plagued by mounting losses and significant redemptions.  In this first installment in a two-part series, we provide a comprehensive overview of recent regulatory developments relating to short selling.

    Read Full Article …
  • From Vol. 1 No.23 (Oct. 28, 2008)

    New Rule Requires Disclosure of Hedge Fund Short Positions to the SEC, But Not to the Public

    On October 15, the Securities and Exchange Commission issued interim temporary final Rule 10a-3T, requiring hedge funds to report short positions, but providing that such positions would not be publicly disclosed.  The absence of a public disclosure requirement generally was well received by the hedge fund community, but the rule still left many hedge fund lawyers and other financial observers interviewed by The Hedge Fund Law Report speculating about the agency’s ultimate purpose in collecting the data.

    Read Full Article …
  • From Vol. 1 No.17 (Aug. 1, 2008)

    SEC Subpoenas Hedge Fund in Connection With Suspected Rumormongering

    In recent weeks, the SEC has subpoenaed more than 50 hedge fund advisers, seeking communications relating to their involvement in circulating false rumors intended to drive down the share prices of certain financial companies. According to some experts interviewed by The Hedge Fund Law Report, the SEC’s rumormongering investigation is unlikely to disrupt business as usual in the $2.5trillion hedge fund industry. Others, however, see the investigation as an effort by the agency to exert new powers over hedge funds. In any case, the SEC’s investigation has rekindled the long-running debate in the hedge fund legal community about how to determine when rumors fall on this or that side of anti-market manipulation laws and rules.

    Read Full Article …
  • From Vol. 1 No.2 (Mar. 11, 2008)

    SEC, at open meeting, votes unanimously to propose new rules restricting naked short sales and streamlining the ETF approval process, and to amend the rules relating to privacy of investor data

    • At an open meeting on March 4, 2008, the SEC voted unanimously to: (1) propose a rule cracking down on short selling, (2) propose two rules to streamline the ETF approval process and (3) amend Regulation S-P, dealing with the privacy of investor data.
    • Our reporter, Jonathan Pollard, attended the open meeting and spoke to lawyers and regulators in attendance, and others.
    Read Full Article …