The Hedge Fund Law Report

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

Recent Issue Headlines

Vol. 5, No. 45 (Nov. 29, 2012) Print IssuePrint This Issue

  • Benefits and Burdens to Hedge Fund Managers of Speaking to the Media (Part One of Two)

    The historical reticence of hedge fund managers was, in large part, a function of the very statutes and regulations that made the precipitous growth of the hedge fund industry possible.  The safe harbor that allowed hedge funds to avoid the public offering rules also prohibited managers from generally soliciting or advertising.  The rule that exempted hedge fund managers from investment adviser registration also prohibited managers from holding themselves out to the public as advisers.  And the laws that permitted hedge funds to avoid registering as investment companies prohibited the same hedge funds from engaging in a public offering.  But law and regulation were not the only factors that historically kept managers quiet.  In addition, in many periods before the credit crisis, the capital raising advantage was generally on the side of managers, at least the decent performing ones.  Hedge funds retained an air of exclusivity and manager reticence enhanced that aura.  Much has changed since the crisis, of course.  On the regulatory side, most hedge fund managers now have to register, and doing so allows – in effect, requires – a manager to hold itself out to the public as such.  And the Jumpstart Our Business Startups (JOBS) Act has effectively eliminated the ban on general solicitation.  For a deeper discussion of the contours and consequences of the proposed JOBS Act rules, see “JOBS Act: Proposed SEC Rules Would Dramatically Change Marketing Landscape for Hedge Funds,” The Hedge Fund Law Report, Vol. 5, No. 34 (Sep. 6, 2012).  On the business side, the post-crisis capital raising advantage has generally tipped towards institutional (and, increasingly, retail) investors.  As a result, managers have been able, as a legal matter, and have been required, as a business matter, to make their cases and pitch their products.  Most such efforts at persuasion have been undertaken in one-on-one meetings or at small events.  But to an increasing degree, hedge fund managers are talking to the financial and general press, appearing on television and otherwise interacting with mass media.  Doing so in a structured, thoughtful and well-advised way offers numerous benefits to managers.  But various legal and business risks continue to loom large.  This article is the first in a two-part series weighing the benefits and burdens to hedge fund managers of speaking to the press, and outlining best practices and compliance recommendations for interactions between managers and the media.  In particular, this article discusses the historical reluctance on the part of managers to speak to the press; how the JOBS Act and other legal and regulatory changes have relaxed that reluctance; and six discrete benefits to hedge fund managers of speaking with the press.  The second installment in the series will discuss the risks to managers of speaking with the press; situations where managers should avoid speaking to the press; and best practices and compliance recommendations for communications between principals and employees of hedge fund managers and the media.

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  • Rajaratnam Prosecutor and Dechert Partner Jonathan Streeter Discusses How the Government Builds and Prosecutes an Insider Trading Case against a Hedge Fund Manager

    Allegations of insider trading in the hedge fund industry are once again front-page news, what with the criminal and civil charges filed against former CR Intrinsic portfolio manager Mathew Martoma on November 20, 2012 and the receipt by SAC Capital Advisors of a Wells notice on the same day.  See “Fund Manager CR Intrinsic and Former SAC Portfolio Manager Are Civilly and Criminally Charged in Alleged ‘Record’ $276 Million Insider Trading Scheme,” The Hedge Fund Law Report, Vol. 5, No. 44 (Nov. 21, 2012).  But insider trading considerations were never far from the minds of hedge fund managers, lawyers or compliance professionals.  This is because vigorously pursuing important corporate information is central to most hedge fund strategies, yet doing so inherently involves the risk of obtaining material nonpublic information and trading on it.  At the same time, allegations of insider trading usually damage a hedge fund business fundamentally, and often shut it down altogether.  See “Navigating the Patchwork of Global Insider Trading Regulations: An Interview with Adam Wasserman of Dechert,” The Hedge Fund Law Report, Vol. 5, No. 38 (Oct. 4, 2012).  Hedge fund managers need to understand how the government thinks about this critical area, and it would be hard to find someone with better visibility into relevant government decision-making than former Deputy Chief of the DOJ’s Criminal Division and current Dechert partner Jonathan Streeter.  Streeter served as lead trial counsel for the government in the criminal trial of Raj Rajaratnam, founder and principal of the Galleon Group.  See “Galleon Management, LLC Founder Raj Rajaratnam Sentenced to 11 Years in Prison for Insider Trading,” The Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011).  Prior to the recent activity involving SAC, the Rajaratnam trial and conviction occasioned the last great crescendo of interest in hedge fund insider trading.  Among other things, the trial highlighted the new centrality of wiretap evidence and caused lawyers to revisit the meaning of the “mosaic theory.”  See “Is the ‘Mosaic Theory’ a Viable Defense to Insider Trading Charges Against Hedge Fund Managers Post-Galleon?,” The Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011).  Our interview with Streeter covered, among other things: how the government identifies targets for wiretaps; the communication channels covered by wiretaps (e.g., phones, e-mails); coordination between the DOJ and the FBI in sharing wiretap evidence; the extent to which the SEC can use wiretap evidence in its investigations and enforcement actions; the effectiveness of techniques used to challenge wiretaps; advice to personnel confronted with their wrongdoing and how to respond to government requests for cooperation; the value of cooperating with the government; the utility of a fund manager’s self-reporting of insider trading by an employee; how to handle government requests for information about insider trading by other hedge fund managers; the government’s view of the mosaic theory; how the government determines whether to make an insider trading investigation public; steps fund managers can take to avoid insider trading liability when talking with corporate executives or using expert networks; and the sources used by the government to identify potential insider trading targets.  The following is a complete transcript of our interview with Streeter.  This interview was conducted in connection with the Regulatory Compliance Association’s Compliance, Risk & Enforcement 2012 Symposium, which will take place on December 18, 2012 at the Pierre Hotel in New York.  For more information on the Symposium, click here.  To register for the Symposium, click here.  Hedge Fund Law Report subscribers are eligible for a registration discount.

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  • Practising Law Institute Panel Discusses Sweeping Regulatory Changes for Hedge Fund Managers That Trade Swaps

    The Practising Law Institute recently hosted its “Hedge Funds 2012: Strategies and Structures for an Evolving Marketplace” program, which included a panel entitled “Trading Issues Relating to Swaps Under Dodd-Frank: The CFTC’s Expanded Registration Requirements for Commodity Pool Operators.”  This panel provided a comprehensive overview of the business consequences for buy-side swaps market participants (such as hedge fund managers that trade swaps) of the regulatory changes caused by the Dodd-Frank Act.  This article summarizes the notable insights from the panel discussion, including coverage of which entities must register as commodity pool operators (CPOs) or commodity trading advisors (CTAs) based on their swaps trading activity; the registration exemptions available to such CPOs and CTAs; certain regulations governing CPOs and CTAs that are required to register; and the regulations governing trading and clearing of swaps.  See also “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).

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  • FSA Report Warns Investment Managers to Revise Their Compliance Policies and Procedures to Address Key Conflicts of Interest

    In response to a series of thematic reviews of asset managers conducted between June 2011 and February 2012, the U.K.’s Financial Services Authority (FSA) has expressed concern over how asset managers are identifying, evaluating and managing conflicts of interest.  In a November 2012 report, the FSA highlighted specific conflicts of concern, including personal trading by employees and other conflicts.  The FSA indicated in the report that it expects asset managers to take immediate action to evaluate their conflicts of interest policies and procedures to ensure compliance with FSA principles and rules.  The report also requires specific action by the CEOs of certain asset managers by February 28, 2013.  This article summarizes key takeaways from the report for U.K.-based hedge fund managers and non-U.K. managers with offices, operations or investments in the U.K.

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  • SEC Charges Hedge Fund Manager with Impermissible Cross Trades, Inflating Valuation and Misleading Investors in a Scheme to Hide Fund Losses

    On November 8, 2012, the SEC filed a Complaint in federal district court charging a hedge fund manager and its owner with engaging in impermissible cross trades, inflating values of securities in fund portfolios and misleading investors in an attempt to disguise trading losses suffered by its hedge funds incurred from investments in risky tranches of a collateralized debt obligation.  This article summarizes the allegations, claims and relief sought by the SEC.  For more on the law governing cross trades by hedge fund managers, see “Trading Practices Session at SEC’s Compliance Outreach Program National Seminar Addresses Need for Holistic Compliance Procedures Dealing with Allocations, Best Execution and Cross Trades,” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).

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  • Use by Private Fund Managers of the British Virgin Islands for Private Equity Fund Formation and Private Equity Investments

    The British Virgin Islands (BVI) has a reputation of being Asia’s favoured offshore jurisdiction for companies.  However, whilst the use of BVI companies as holding companies, sole director entities and, more recently, listing vehicles for Hong Kong initial public offerings is well known, the advantages of the BVI as a domicile of choice in the context of private equity transactions is not as widely recognized.  Many features which make the BVI an attractive domicile for listing vehicles also make it an attractive jurisdiction for private equity investments and for the formation of private equity funds.  In a guest article, Michael Gagie and James Gaden, both partners at Maples and Calder, outline some of the benefits of the BVI as an attractive jurisdiction for private equity transactions and for the formation of private equity funds.

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  • Former FinCEN Director James H. Freis, Jr. Joins Cleary Gottlieb as Counsel in Washington, D.C.

    On November 12, 2012, Cleary Gottlieb Steen & Hamilton LLP announced that James H. Freis, Jr., former Director of the U.S. Treasury Department’s Financial Crimes Enforcement Network, will join the firm as counsel in its Washington, D.C. office.  See “Do Hedge Funds Really Pose a Money Laundering Threat?  A Decade of Regulatory False Starts Raises Questions,” The Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).

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  • Ben Eaton Joins Goodwin Procter in London as a Partner Focused on Taxation of Investment Funds and Real Estate Transactions

    On November 21, 2012, Goodwin Procter announced that Ben Eaton has joined the firm as a partner in its London office.

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