The Hedge Fund Law Report

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

Recent Issue Headlines

Vol. 5, No. 26 (Jun. 28, 2012) Print IssuePrint This Issue

  • 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

    On June 26, 2012, the SEC filed three separate complaints relating to securities law violations allegedly committed by Philip A. Falcone, his investment advisory firm, Harbinger Capital Partners LLC (Harbinger) and other entities and individuals.  In the first complaint, the SEC charged Falcone, Harbinger and Peter Jenson, a former Managing Director and Chief Operating Officer of Harbinger, with violations of the federal securities laws in relation to the misappropriation of client assets (through the making of a $113.2 million loan from a fund managed by Harbinger to Falcone to pay his personal taxes) and the granting of undisclosed preferential redemption rights to certain investors.  See “Key Legal Considerations in Connection with Loans from Hedge Funds to Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 3, No. 28 (Jul. 15, 2010).  In the second complaint, the SEC charged Falcone, Harbinger Capital Partners Offshore Manager, L.L.C. and Harbinger Capital Partners Special Situations GP, L.L.C. with engaging in an illegal short squeeze to manipulate bond prices.  In the third complaint, the SEC charged Harbert Management Corporation, HMC-New York, Inc. and HMC Investors, LLC with control person liability in relation to the alleged market manipulation described in the second complaint.  Separately, the SEC issued an order settling claims with Harbinger related to violations of Rule 105 under Regulation M.  This article details the charges levied by the SEC in the three complaints and details the terms of the settlement with Harbinger related to the Rule 105 violations.

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  • How Hedge Fund Managers Can Use Arbitration Provisions to Prevent Investor Class Action Lawsuits

    As can be expected during an economic downturn, hedge fund managers were not impervious to investor dissatisfaction following the 2008 financial crisis.  In some instances, this dissatisfaction resulted in litigation.  A recent trend is for investors to threaten to bring their claims as a class action, which not only carries the possibility of exponentially increasing potential damages, but also harming the reputation of the manager and its ability to raise capital in the future.  Nearly all fund governing documents contain arbitration provisions that require any and all claims relating to investment accounts to be arbitrated in private, confidential proceedings.  However, most arbitration provisions contained in fund governing documents are silent on the availability of class arbitration, and this issue is significant for hedge fund managers to consider both retrospectively and prospectively in drafting their governing documents.  While the issue of the permissibility of class actions in arbitration has been the subject of recent judicial scrutiny, reported cases have not yet applied the issue to the hedge fund industry.  In a guest article, Joshua G. Hamilton and Adam M. Sevell, partner and associate, respectively, at Paul Hastings, consider the interplay of recent court opinions dealing with the limitations on class action arbitrations and whether class actions should be permitted in the context of disputes between an investor, on the one hand, and a hedge fund and its manager, on the other hand, and offer some best practices for hedge fund managers seeking to preclude class arbitration.

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  • Hedge Funds and Managers Must File Foreign Bank Account Reports by June 30, 2012

    Every U.S. person or entity that had either a financial interest in, or signatory authority or other authority over, a financial account in a foreign country must file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts), commonly referred to as an “FBAR,” if the aggregate value of such account(s) exceeded USD $10,000 at any time during calendar year 2011.  In a guest article, Joseph Pacello, a tax principal at Rothstein Kass, and Deirdre Joyce, a senior international tax manager at Rothstein Kass, discuss, with respect to FBAR filings: imminent filing deadlines; key definitions; notable changes for 2010 and subsequent year reporting; FBAR constructive ownership rules; significant penalties for failure to file; the 2012 offshore voluntary disclosure program; six specific examples of FBAR reporting requirements; and filing instructions.  The article concludes with a chart comparing Form 8938 and FBAR filing requirements.

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  • Certain Hedge Fund Managers and Funds That Engage in Foreign Transactions Will Need to File Form BE-11 Imminently

    The U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) collects information on foreign investment by U.S. persons by issuing surveys that must be completed and returned by certain U.S. persons, which could include hedge fund managers and hedge funds.  One of these surveys, called the Annual Survey of U.S. Direct Investment Abroad (Form BE-11) requires U.S. persons that own, directly or indirectly, 10% or more of the voting securities of a foreign affiliate to complete and file Form BE-11 by May 31 of each year if the foreign affiliate crosses certain financial thresholds.  Form BE-11 has recently garnered significant attention within the hedge fund industry because the BEA has informally indicated that it may take enforcement action against those U.S. persons that fail to file Form BE-11 as required.  As such, as the May 31, 2012 deadline approached, many hedge fund managers petitioned for an extension to the filing deadline, and the BEA indicated that it would provide short extensions (from one month to three months) for filers.  The length of the extension varies depending on the number of Forms BE-11 required to be filed.  Failure to file Form BE-11 as required may lead to civil and criminal penalties.  This article discusses Form BE-11 filing requirements applicable to hedge fund managers.

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  • 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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  • SEC Staff Publishes Answers to Frequently Asked Questions Concerning Form PF

    On June 8, 2012, the SEC’s Division of Investment Management (Staff) published answers to seven frequently asked questions about Form PF, covering topics such as the definition of a “commodity pool”; the definition of a “hedge fund”; the reporting treatment of hedge funds; treatment of parallel managed accounts; and the definition and treatment of “disregarded private funds.”  This article highlights the primary practice points from the Staff answers.

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  • Delaware Chancery Court Decision Highlights the Imperative of Thorough Due Diligence on Potential Hedge Fund Business Partners

    As a hedge fund manager, you are required as a legal matter to “know your customers,” that is, your investors.  In addition, you are required as a practical matter to know your partners.  In many cases, this imperative is beside the point: many hedge fund management businesses are founded by partners that have been working together for years.  In other cases, however, management companies are organized by partners that met only recently.  In such cases, the partners should perform thorough due diligence on one another.  It may seem contrary to the optimism, trust and team spirit required to scale the increasingly high barriers to beginning in the hedge fund business.  But a recent Delaware Chancery Court (Court) opinion highlights the fact that the stakes are too high to rely on gut feelings.  The stakes are even too high to rely on routine due diligence conducted by credible service providers.  The stakes are nothing less than your personal reputation, and in the investment management business, that is all you have or can have.  Diligence in this context should be deep, customized and cross-checked.  Once you get into bed with a bad actor in the investment management business, it is virtually impossible – from a reputation point of view – to get out.

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  • Litigator Robert W. Scheef Joins McKool Smith’s New York Office

    On June 27, 2012, McKool Smith announced that Robert W. Scheef has joined the firm as a principal in its New York office.

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  • ISIS Fund Services Hires Marc Weaver as Senior Vice President of Operations

    On June 25, 2012, ISIS Fund Services Ltd. announced the hiring of Marc Weaver as Senior Vice President of Operations.

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  • The Hedge Fund Law Report Will Not Publish an Issue Next Week and Will Resume Its Regular Publication Schedule the Following Week

    Please note that The Hedge Fund Law Report will not publish an issue next week, the week starting July 2, 2012, and will resume its regular publication schedule the following week, the week starting July 9, 2012.

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