The Hedge Fund Law Report

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

Recent Issue Headlines

Vol. 1, No. 16 (Jul. 22, 2008) Print IssuePrint This Issue

  • An IRS Trifecta: Three Public Releases Affecting Hedge Funds and Funds of Funds Issued on One Day

    A triumvirate of IRS releases all issued on July 3, 2008 clarify the deductibility of hedge fund investment interest expenses by hedge fund investors, and the tax treatment of fund of funds management fees. Guest contributor Mark H. Leeds, a Shareholder of Greenberg Traurig LLP, explains the releases in a lucid, insightful and timely article.

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  • New Insurance Products Promise to Protect Investors From Hedge Fund Fraud

    Two new insurance products offer to cover investors in hedge funds in the event of fraud or alleged fraud on the part of hedge fund managers or employees. Both offer novel coverage structures, and employ creative mechanisms to combat the twin problems of moral hazard and adverse selection. If the products are successful, they may, at the margin, help persuade various risk-averse money managers and institutional investors to invest in hedge funds.

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  • SEC Begins Using Revised Examination Document and Information Request Letter

    The SEC has started using a revised template document and information request letter in connection with its examinations of registered investment advisers and other registered entities. The revised letter replaces the controversial 27-page letter released last year by the SEC’s New York Regional Office. The revised letter is shorter and contains more general requests for documents and information, which may mean fewer requests from the SEC up front, but more supplementary requests in the course of an examination. The revised letter also contains certain categories of requests focused specifically on advisers to private funds.

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  • Article Evaluates New Hedge Fund Antifraud Rule

    A recent article describes the elements and potential applications and interpretations of the SEC’s recently-promulgated Rule 206(4)-8, the antifraud rule specifically targeted at hedge fund managers.  The release accompanying the rule contained a controversial suggestion that negligence by an adviser might suffice to prove a violation of the antifraud rule, which many securities lawyers viewed as a downward departure from the usual scienter standard for fraud.  The article contains a productive discussion on how the “negligent fraudulent conduct” standard may be reconciled with traditional antifraud jurisprudence, including caselaw under Rule 10b-5.

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  • New York Supreme Court Grants Summary Judgment to Auditor on Fund Liquidators’ Claim that Auditor Negligently Failed to Detect and Report Fraudulent Valuations by Fund Managers

    On June 19, 2008, the New York State Supreme Court in Manhattan granted summary judgment to the auditor of a failed Cayman Islands hedge fund on claims of negligence brought by the fund’s joint official liquidators. In the factual circumstances of the case, the court determined that the auditor’s failure to detect fraudulent valuations of portfolio securities by the fund’s managers, and the auditor’s resulting failure to alert the fund’s directors to the fraudulent valuations, did not constitute negligence. The case illustrates the standard of care to which US-based courts will hold auditors of Cayman Islands funds, and sheds light on the limits of the duties owed by auditors to fund investors and directors.

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