On November 15 and 16, 2010, Financial Research Associates, LLC and the Hedge Fund Business Operations Association presented a Hedge Fund Compliance Summit at the Princeton Club in New York City.  The substance of the Summit was relevant – even prescient – and the timing was fortuitous.  Insider trading was a prominent topic of discussion at the Summit, and on November 20, 2010, about two weeks after the Summit, insider trading received a stunning boost on the list of concerns of hedge fund managers.  That day, The Wall Street Journal and other sources disclosed the existence of a wide-ranging civil and criminal insider trading probe being jointly conducted by the SEC and the U.S. Attorney’s Office in Manhattan.  Then, on Monday, November 22, 2010, the Federal Bureau of Investigation raided the offices of three hedge fund managers.  According to press reports, at least one purpose of those raids was to gather documents in connection with the insider trading investigation reported by the Journal.  Following the raids, a number of well-known hedge fund and mutual fund managers received subpoenas from the U.S. Attorney’s Office in Manhattan.  According to press reports, those subpoenas are very broad and include requests for documents and information relating to use of expert networks and soft dollar practices.  See “For Hedge Fund Managers, Expert Networks Offer Access to Corporate Insiders While Mitigating (Though Not Eliminating) the Likelihood of Insider Trading Violations,” Hedge Fund Law Report, Vol. 2, No. 48 (Dec. 3, 2009).  Insider trading is a topic that the Hedge Fund Law Report has covered in depth, and that we intend to cover in even more depth in the coming months.  Notably, Harry S. Davis (who participated at the Summit), Richard Morvillo and Justin Mendelsohn, all of Schulte Roth & Zabel LLP, published an article on insider trading in the HFLR earlier this year that we think should be required reading for hedge fund manager personnel.  See “Hedge Funds in the Crosshairs: The Law of Insider Trading in an Active Enforcement Environment,” Hedge Fund Law Report, Vol. 3, No. 7 (Feb. 17, 2010).  Also, Michael D. Trager, Richard L. Jacobson and Christopher Rhee, of Arnold & Porter LLP, published an article in the HFLR that can – and should – be read as a companion piece to the Schulte article.  See “The SEC’s New Focus on Insider Trading by Hedge Funds,” Hedge Fund Law Report, Vol. 3, No. 22 (Jun. 3, 2010).  Our coverage of the Summit complements these and other HFLR articles on insider trading by highlighting the more important and nonintuitive insights offered by Summit participants on insider trading.  In particular, we discuss points raised by panelists on consultants and expert networks, sharing of information among personnel at different hedge fund managers, rumors and insider trading considerations in connection with bank debt trading.  Beyond insider trading, this article summarizes key insights from Summit participants regarding SEC examinations and identification and mitigation of key risks.  A follow-up article will discuss points made by Summit participants on compliance considerations in connection with preparing and using marketing and advertising materials, valuation and avoiding investor lawsuits. Read full article …

As further evidence of the renewed focus of the Securities and Exchange Commission (SEC) on insider trading, especially within the hedge fund and investment management industries, the SEC has issued an Order imposing fines and a cease and desist order on research boutique The Buckingham Research Group, Inc. (BRG), investment manager Buckingham Capital Management, Inc. (BCM) and Lloyd R. Karp (Karp).  BCM is a wholly-owned subsidiary of BRG and shares an office suite with it.  Karp served as chief compliance officer for both BCM and BRG.  The SEC claimed that, commencing at least as early as 2005, BRG and BCM failed to have in place adequate procedures “to prevent the misuse of material, non-public information,” as required by both the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934.  In addition, BRG, BCM and Karp failed to follow the limited procedures that they did have in place and fabricated data in response to an SEC examination of those procedures.  We summarize the SEC’s Order and the remedial measures it requires. Read full article …

On November 18, 2010, the New York State Attorney General (AG) and the U.S. Securities and Exchange Commission (SEC) filed related civil charges against Steven L. Rattner, founder and former principal of the Quadrangle Group, LLC (Quadrangle), for his participation in a pay to play kickback scheme devised by former members of the New York State Comptroller’s Office, administrators of the New York State Common Retirement Fund (CRF).  The complaints accuse Rattner of arranging a distribution deal for a film produced by the brother of David Loglisci, the Deputy Comptroller; retaining and paying Henry “Hank” Morris, the top political adviser and chief fundraiser for former State Comptroller Alan Hevesi, over $1 million in sham placement fees; and of obtaining, at Morris’ request, $50,000 in third-party contributions for Hevesi’s reelection campaign, in order to secure a $150 million investment in a Quadrangle fund from the CRF.  Rattner agreed to settle with the SEC, while neither admitting nor denying any wrongdoing.  The AG’s civil action remains pending.  The SEC and the AG have already brought cases against other parties to the pay to play scheme.  On April 19, 2010, the SEC settled a related action against Quadrangle and its affiliates.  SEC v. Quadrangle Group LLC, et al., 10-CV-3192.  It has also accused Morris, Loglisci and several others with orchestrating the fraudulent scheme to extract kickbacks from investment management firms.  SEC v. Morris, et al., 09-CV-2518.  Similarly, the AG has filed and obtained civil settlements from nineteen individuals, as well as guilty pleas from eight individuals, including: Hevesi, who, on October 7, 2010, pled guilty to receiving a reward for official misconduct; Loglisci, who, on March 10, 2010, pled guilty to violating the Martin Act; and Morris, who, on November 22, 2010, pled guilty to violating the Martin Act.  Morris admitted in court that he “intentionally engaged in fraud, deception . . . and made material false representations and statements with intent to deceive and defraud.”  This article details the allegations in the respective complaints and the causes of action against Rattner. Read full article …

The Securities and Exchange Commission (SEC) has accepted an offer of settlement from James Perkins, the CEO and managing member of Thrasher Capital Management, LLC (Thrasher), an investment adviser registered with the SEC, for failing to make documents available to the SEC and for making false statements of material fact on Thrasher’s Form ADV.  Pursuant to the settlement, on November 16, 2010, the SEC issued an Order setting forth civil penalties against Perkins and Thrasher, including a cease-and-desist order, suspending Perkins from association with any investment adviser for nine months and revoking Thrasher’s registration.  Perkins escaped any monetary penalties because he submitted financial statements and other evidence of his inability to pay.  Perkins and Thrasher did not admit or deny the SEC’s findings set forth in its Order, except for admission of the SEC’s jurisdiction and the subject matter of the Order.  The matter helps define the appropriate scope of disclosure in a Form ADV.  Such disclosure, in turn, is newly relevant to the hedge fund industry because the Dodd-Frank Act will require many hedge fund managers to file Form ADV, in many cases for the first time, by July 21, 2011. Read full article …

On November 23, 2010, Swank Capital announced that Barry Y. Greenberg has joined Swank Capital as its new general counsel and chief compliance officer.  He also serves in that capacity for The Cushing^® MLP Funds.  Greenberg is responsible for oversight of the firm’s legal and regulatory compliance functions.  He will also work closely with senior management on product development and other strategic initiatives. Read full article …