• |

    Apr. 19, 2012

What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed? (Part Two of Three)

For hedge fund managers, mobile devices present benefits and risks.  On the benefit side, mobile devices enable employees to perform their jobs more efficiently – they reduce the relevance of geography and save considerable time.  But on the risk side, mobile devices create innumerable small cracks in the wall separating a manager’s confidential data from unauthorized use of that data.  Unfortunately for managers that globally determine that the risks outweigh the benefits, there is no realistic way to avoid confronting mobile devices.  Such devices have become an integral part of professional life in the service economy, and they play a particularly central role in information-driven businesses like hedge fund management.  Accordingly, the question for hedge fund managers is not whether to implement and enforce mobile device policies and procedures, but how.  This is the second article in a three-part series designed to answer this question.  The first article in this series made the “case” for the importance of mobile device policies and procedures for hedge fund managers.  It did so by illustrating the myriad risks imposed on a manager by the absence of such policies and procedures, including susceptibility of critical information to leakage or theft, unauthorized trading, penetration of systems by malware and viruses and other potential detriments.  See “What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed?  (Part One of Three),” Hedge Fund Law Report. Vol. 5, No. 15 (Apr. 12, 2012).  This article explains how hedge fund managers can anticipate and address those risks using policies, procedures and technology solutions.  This article starts by identifying three suggested steps that hedge fund managers should take before crafting their mobile device policies and procedures.  The article then makes specific recommendations regarding the content of mobile device policies and procedures.  As is evident in the discussion in this article, policies, procedures and technology are inextricably linked in this context, and effective policies and procedures must be informed by a thorough understanding of the relevant technology.  This article, accordingly, intersperses the legal and compliance discussion with a detailed description of available technology solutions.

Protecting Hedge Funds’ Trade Secrets: What a Difference a Year Makes

Hedge fund managers zealously guard their trade secrets from unauthorized access and use and seek to prosecute misappropriation or misuse of such trade secrets because they represent a significant asset of the firm.  In December 2010, Sean R. O’Brien and Sara A. Welch, Managing Partner and Counsel, respectively, at O’Brien LLP, published in the Hedge Fund Law Report an article analyzing the government’s efforts to regulate and protect, through the aggressive enforcement of criminal laws, the trade secrets underlying proprietary hedge fund trading strategies.  See “Protecting Hedge Funds’ Trade Secrets: The Federal Government’s Enforcement of Criminal Laws Protecting Proprietary Trading Strategies,” Hedge Fund Law Report, Vol. 3, No. 48 (Dec. 10, 2010).  At that time, the government had recently obtained the criminal convictions of two former employees of high-frequency trading firms who were alleged to have misappropriated computer code relating to high frequency trading systems.  Two recent rulings by federal appellate courts have significantly reined in the government’s efforts in this area.  The appellate courts have significantly narrowed the scope of criminal liability that may be imposed upon an employee who is alleged to have misappropriated elements of proprietary trading strategies, especially if the challenged conduct involves only the taking of “intangible” aspects of those strategies.  The rulings are therefore of great interest to both hedge fund managers and their employees.  This follow-up article by O’Brien and Welch discusses the rulings and the reasoning in the two federal appellate court decisions.

Does a Side Letter Granting Preferential Redemption Rights Survive a Hedge Fund Restructuring?

In the aftermath of the 2008 financial crisis, some hedge fund managers felt compelled to restructure their funds to manage liquidity and to balance the interests of redeeming and continuing investors.  Many such restructurings required investors to either consent to the restructuring or make an election relating to the restructuring.  Nonetheless, many such reorganizations were quickly conceived and may not have considered the survivability of side letters pertaining to the original fund investment.  In dueling complaints recently filed in courts in the Cayman Islands and New York State, a hedge fund and a fund of funds, and their respective managers, initiated litigation focused on the following question: Does a side letter that granted a hedge fund investor, among other things, preferential redemption rights, survive a hedge fund restructuring, or does such a side letter terminate upon the making of a restructuring election by the hedge fund investor?  This article summarizes the complaints, the context and the implications of the litigation for hedge fund managers and investors.  On preferential redemption rights generally, see “Are Side Letters Granting Preferential Transparency and Liquidity Terms to One Investor Ipso Facto Illegal?,” Hedge Fund Law Report, Vol. 4, No. 18 (Jun. 1, 2011).

Corgentum Webinar Highlights Trends, Challenges and Best Practices for Hedge Fund Investors in Conducting Operational Due Diligence

We at the Hedge Fund Law Report have heard operational due diligence defined – persuasively but expansively – as the rigorous evaluation of all non-investment aspects of the business of a hedge fund manager.  A robust consensus has developed in the hedge fund industry around the importance of operational due diligence, but there is less consensus on precisely what operational due diligence entails or how to conduct it.  The absence of uniformity in implementation, in turn, is likely a function of the fact that no two managers are exactly alike.  The term “hedge fund manager” encompasses a wide range of businesses in terms of strategy, sophistication, staffing, size and other factors.  Therefore, operational due diligence is often driven by principles, experience and best practices rather than hard and fast rules.  See “Legal and Operational Due Diligence Best Practices for Hedge Fund Investors,” Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012).  Hedge fund investors and managers must understand the operational due diligence process thoroughly, for different but related reasons.  Investors have to understand the process to make informed investments and avoid frauds, and managers have to understand the process to anticipate and accommodate due diligence requests from investors.  For parties in either category, the more you know, the better; you can never know enough; and what you think you know is constantly evolving.  To bring some clarity and coherence to this ambiguous but critical area, Corgentum Consulting, LLC (Corgentum), a firm that provides operational due diligence consulting services, recently hosted a webinar on trends, challenges and best practices in conducting operational due diligence on hedge fund managers.  Jason Scharfman, Managing Partner of Corgentum, conducted the webinar and covered, among other things: how to staff an operational due diligence team; trends and challenges that hedge fund investors face in conducting operational due diligence; and techniques that hedge fund investors can employ to maximize the effectiveness of their operational due diligence efforts.  This article summarizes the key points made during the webinar on each of these topics.

Mechanics of a Hedge Fund Manager IPO

On April 12, 2012, Oaktree Capital Group (Oaktree), one of the world’s largest managers of credit-focused hedge funds and private equity funds, conducted a public offering of Class A units (Public Offering).  The Rule 424(b) prospectus, filed April 12, 2012 (Prospectus), indicated that all of the proceeds from the Public Offering will be directed towards acquiring interests in Oaktree’s business from its principals, employees and investors, including Oaktree’s senior management.  In other words, the Public Offering represents an opportunity for such persons to monetize their firm holdings.  Principals and employees may wish to monetize their holdings for various reasons.  For instance, some principals and employees may wish to diversify their financial holdings.  Others may view monetization of their interests as a step in the succession planning process whereby economic ownership of the firm can be transferred to others.  See “Key Considerations for Hedge Fund Managers in Developing a Succession Plan (Part Two of Two),” Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  The Public Offering may portend a trend in public offerings by investment management firms, including a highly-anticipated public offering of approximately 10% of the interests in Carlyle Group LP that is expected to be consummated in the near future.  This article discusses the details of the Oaktree Public Offering and highlights some of the benefits and costs to a hedge fund manager going public in comparison to other monetization alternatives, such as pursuing a merger or acquisition of the firm.  See “Buying a Majority Interest in a Hedge Fund Manager: An Acquirer’s Primer on Key Structuring and Negotiating Issues,” Hedge Fund Law Report, Vol. 4, No. 17 (May 20, 2011).

Recent SEC Complaint Brings Together Two Headline Enforcement Trends: Insider Trading and China

The SEC’s Division of Enforcement (Division of Enforcement) has redoubled its efforts to prosecute those engaged in various securities law violations by initiating a record 735 enforcement actions in 2011.  One of the SEC’s key initiatives has focused on ferreting out insider trading, and a number of the targets have been hedge fund managers and their personnel.  See “SEC Files Civil Insider Trading Complaint Against Diamondback Capital Management, Level Global Investors and Seven Individuals Based on Trading in Dell and Nvidia; Diamondback Strikes Non-Prosecution Deal with U.S. Department of Justice and Settles with the SEC for $9 Million,” Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).  It appears that the Division of Enforcement’s attempts to enhance its subject matter expertise and to upgrade the analytical and technological tools used to sniff out fraud have contributed to these efforts, as recently demonstrated by an action brought by the SEC against six Chinese traders and a British Virgin Islands corporation trader alleged to have engaged in insider trading.  This article describes the factual allegations, causes of action and relief sought by the SEC in the Complaint, as well as the cautionary lessons to be learned by hedge fund managers from the Complaint.  See “Insider Trading – The Long View,” Hedge Fund Law Report, Vol. 4, No. 38 (Oct. 27, 2011).

Funds and Securities Regulatory Attorney Mary Payne Expands Reed Smith’s ETF and Insurance Investments Practice

On April 11, 2012, Reed Smith LLP announced the arrival of Mary Thornton Payne as a partner in its Financial Industry Group in the firm’s Washington, D.C. office.

Matthew Solomon Named Deputy Chief Litigation Counsel in SEC Enforcement Division

Matthew C. Solomon has been appointed Deputy Chief Litigation Counsel of the SEC’s Division of Enforcement.

Most-Read Articles