The Hedge Fund Law Report

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

Recent Issue Headlines

Vol. 2, No. 47 (Nov. 25, 2009) Print IssuePrint This Issue

  • For Hedge Fund Managers in a Heightened Enforcement Environment, Internal Investigations Can Help Prevent or Mitigate Criminal and Civil Charges

    In the public company context, internal investigations have become an accepted and expected adjunct of good corporate governance.  In response to even the remotest whiff of a violation of law, regulation or internal policy, prudent public company managers generally initiate a thorough investigation with the twin goals of fact-finding and precluding or mitigating civil or criminal charges.  As responses by some notable hedge fund managers to the Galleon allegations have demonstrated, the purposes, goals and many of the techniques of internal investigations developed in the public company context apply, albeit with some variation, in the hedge fund world.  That is, for hedge fund managers whose current or former principals or employees have been or may be charged with civil or criminal violations, or may simply be in the zone of suspicion, an internal investigation can uncover relevant evidence, identify the absence of evidence and can credibly demonstrate to regulators and prosecutors that the hedge fund manager has an independent commitment to compliance and thus does not require any external prodding in that regard.  In light of the explicitly stated plan on the part of the SEC’s Enforcement Division to step up enforcement of insider trading laws and regulations applicable to hedge fund managers, internal investigations are expected to become a more standard aspect of hedge fund legal and operational practice.  However, hedge fund managers as a group have a relatively short track record with internal investigations, at least compared to public company managers, and internal investigations in the hedge fund context raise specific concerns.  Accordingly, this article seeks to acquaint hedge fund industry participants with the primary issues to be considered when initiating and conducting an internal investigation, and in doing so discusses: recent examples of internal investigations initiated by operating companies and hedge fund managers in response to the Galleon allegations; the eight most common contexts in which a hedge fund manager may consider initiating an internal investigation; the purpose of an internal investigation; when and how to define the scope of an internal investigation; whether the fact and any findings of an investigation must be disclosed; retention of documents and records; whether an investigation should be conducted by internal personnel or outside law and accounting firms; who outside counsel represents; whether or not an investigation report should be written; and what to do if the investigation uncovers a violation.

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  • New CFTC Rules Significantly Amend Reporting Requirements Applicable to Commodities-Focused Hedge Fund Managers

    On November 9, 2009, the Commodity Futures Trading Commission (CFTC) adopted several amendments to its regulations applicable to commodity pool operators (CPOs).  These Final Rules specify detailed information that must be included in periodic account statements and annual reports for commodity pools with more than one series or class of ownership interest; clarify that periodic account statements must disclose either the net asset value (NAV) per outstanding participation unit in the pool, or the total value of a participant’s interest in the pool; extend the time period for filing and distributing annual reports of commodity pools that invest in other funds; codify existing CFTC staff interpretations regarding proper accounting and financial statement presentation of certain income and expense items in financial reports; streamline annual reporting requirements for pools ceasing operation; establish conditions for use of International Financial Reporting Standards in lieu of U.S. Generally Accepted Accounting Principles and clarify and update several other requirements for periodic and annual reports to be prepared and distributed by CPOs.  The Final Rules become effective on December 9, 2009 and apply to commodity pool annual reports for fiscal years ending December 31, 2009 or later.  The amended rules will have a significant effect on the regulatory environment in which commodities-focused hedge fund managers operate.  Accordingly, this article offers a detailed explanation of the amendments and the resulting new reporting obligations applicable to CPOs.

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  • How Will Registration and Reporting Impact Hedge Fund Managers? An Interview with Todd Groome, Non-Executive Chairman of the Alternative Investment Management Association (Part 2)

    On November 3, 2009, the Alternative Investment Management Association (AIMA) reiterated its support for the registration of hedge fund managers operating in the U.S. and for the reporting of systemically relevant information by larger managers to national authorities in the interest of financial stability.  The following day, the Financial Services Committee of the U.S. House of Representatives, by a vote of 41 to 28, approved a bill that would impose a registration mandate, The Private Fund Investment Advisers Act of 2009, sponsored by Rep. Paul Kanjorski (D-PA).  See “U.S. House of Representatives Holds Hearings on Hedge Fund Adviser Registration,” The Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009); “House Subcommittee Considers Bill Requiring U.S. Hedge Fund Advisers with Over $30 Million in Assets Under Management to Register with SEC,” The Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009).  The Hedge Fund Law Report recently interviewed Todd Groome, who since December 2008 has served as Non-Executive Chairman of the AIMA.  (Before assuming his current role, Groome was an Advisor in the Monetary and Capital Markets Department of the International Monetary Fund.)  Our interview focused on topics including: the range of appropriate information for financial reports to national authorities; the capacity of administrators to analyze and act on that information; the disproportionate costs of compliance with reporting requirements for smaller managers; the need to preserve the confidentiality of the information (in its pre-aggregated form) that may be reported by managers; the sources of systemic risk and how to mitigate it; the sharing of information among national authorities; the development of an official multi-national information template; the threat of a tax-driven flight of talent and capital from London; sound practices for hedge fund administrators; the continued viability of an in-house administration option; and the policy or politics behind last year’s bans on short selling in the financial services industry in both the U.S. and the U.K.  The first half of the full transcript of that interview appeared in last week’s issue of The Hedge Fund Law Report.  The remainder of the full transcript is included herein.

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  • “The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History,” By Gregory Zuckerman; Broadway Books, 295 pages

    In 2006, hedge fund manager John Paulson realized something few others suspected – that the housing market and the value of subprime mortgages were grossly inflated and headed for a fall.  Paulson, who knew mergers and acquisitions, knew little about real estate or how to wager against housing.  But Paulson saw an opportunity to bet against the market in complicated derivative investments.  Colleagues at investment banks scoffed at him and investors dismissed him.  Even professionals skeptical about the housing market shied away from him.  But Paulson, obstinate, bet heavily against risky mortgages and precarious financial companies anyway.  Of course, timing is everything.  And, although Paulson lost tens of millions of dollars as real estate and stocks continued to soar, he redoubled his bet, putting his hedge fund on the line.  Then, the markets imploded in the summer of 2007, and Paulson saw profits.  By year’s end, Paulson had pulled off “The Greatest Trade Ever” in financial history, earning more than $15 billion (gross of fees) for funds managed by his firm, Paulson & Co.  In “The Greatest Trade Ever,” Gregory Zuckerman chronicles the unparalleled and unprecedented trade executed by John Paulson, with the help of analyst Paulo Pellegrini and others at Paulson’s firm.  The book provides insider insight into how Paulson and others profited from the subprime market’s demise.  In doing so, it details not only Paulson’s experience, but the experience of other individuals pursuing the same historic trade: Jeffrey Greene, an investor who emulated Paulson; Michael Burry, an investor who read the same problems in the market correctly but had poor timing; and Andrew Lahde, the hedge fund manager who succeeded like Paulson, but on a smaller scale, and then infamously penned a colorful goodbye letter to Wall Street.  None of these players, however, had quite the “smarts, good timing and a touch of the . . . renegade” of Paulson, according to Zuckerman.  This review examines Zuckerman’s remarkably insightful analysis of Paulson’s character, how Paulson was able to foresee the credit crisis based on a single chart, and how Paulson formulated, pursued and completed the “Greatest Trade Ever.”

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  • Olivier Dumas Joins Dechert’s Financial Services Group in Paris

    On November 24, 2009, Dechert LLP announced that Olivier Dumas had joined the firm in Paris as a partner in the financial services practice group.

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  • SAM Capital Partners hires Andrew Kennedy as Chief Operating Officer

    On November 23, 2009, European equities investment specialist SAM Capital Partners announced that it had appointed Andrew Kennedy as its Chief Operating Officer.

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