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    Sep. 11, 2025

Court Imposes Tax Bill of $500 Million on Bankrupt Hedge Fund Manager for Basket Options

On April 16, 2025, the U.S. Tax Court ruled (Decision) against a hedge fund manager in its challenge of an IRS judgment finding that basket options it had purchased from Royal Bank of Canada and Deutsche Bank were taxable on an annual basis and that the manager was, for tax purposes, the owner of the basket securities. The manager, which filed for bankruptcy in April 2024, had made large profits by trading on the securities. It had unsuccessfully argued before the IRS that those profits were long-term capital gains, and hence it was appropriate to defer taxes on them at least until the exercise or termination of the options. The Tax Court rejected that argument, along with the manager’s claims to have relied on legal counsel regarding its trading activities. Given how common it is for hedge funds to use leverage, and to make use of basket option contracts, the ruling against the manager has implications for the private funds space and the direction of tax policy and enforcement. This article presents a summary of the Decision as well as analysis from legal experts. See “Hedge Funds Are Required to Disclose Basket Option Contracts and Basket Contracts” (Aug. 6, 2015).

Governance and Succession Planning for Fund Managers

Many investment fund managers are run as “benevolent dictatorships,” while others are more democratic, according to a Practising Law Institute (PLI) program on governance and succession planning for fund managers’ upper-tier entities. In either case, having a clear, documented governance structure and plans for both anticipated and unanticipated departures of founders and other key personnel are essential to ensuring smooth operations and an eventual transition to a new generation of leaders. They are also important considerations for institutional investors. The program covered governance and decision-making; founders’ retirement; business divorces; withdrawal of key personnel; succession planning; and sales of stakes in the fund manager’s general partners. Joshua Cohen, partner at Norton Rose Fullbright, moderated the discussion, which also included Jennifer M. Dunn, partner at Proskauer; Elizabeth Shea Fries, partner at Sidley Austin LLP; and Colin S. Kelly, partner at Fried Frank. This article synthesizes their remarks. For coverage of other PLI programs, see “To Work Effectively, CCOs Need Authority, Autonomy and Information” (May 22, 2025); and “Answers to Six Key Questions About How Enforcers View Gatekeepers” (Nov. 21, 2024). 

Investment Fund Survey Finds Positive Industry Outlook

“At the close of 2024, both limited partners (LPs) and general partners (GPs) were broadly enthusiastic about investment opportunities following a difficult few years,” according to the Barnes & Thornburg LLP 2025 Investment Funds Outlook report (Report). The Report, the firm’s third annual industry outlook report, covers the most pressing issues facing LPs and GPs; compliance focus areas; key fund terms; succession plans; and respondents’ positive outlook for the economy in general and hedge funds, private credit and the cryptocurrency market in particular. The biggest takeaway from the Report is the “positivity and optimism” of both managers and investors, Barnes & Thornburg partner Scott L. Beal told the Hedge Fund Law Report. “Despite some volatility and turmoil in the markets earlier in the year, the majority of respondents view the general economic outlook (72%), availability of capital (66%) and regulatory environment (64%) as investment opportunities. That is consistent with what we’ve seen in our practice as well,” he said, adding that “it was notable to see that optimism with respect to some sectors or industries that have had challenges in the last few years, including hedge fund and cryptocurrency markets.” This article synthesizes the Report’s key fundings, with additional commentary from Beal. See “Investment Fund Survey Finds Growing Investor Bargaining Power” (Aug. 17, 2023).

CFTC Commissioner Urges Tougher Diligence and Closer Cooperation to Thwart Cyber Threats

Private sector firms have made modest progress in recent years when it comes to adopting cybersecurity best practices, according to then-CFTC Commissioner Kristin N. Johnson. In remarks delivered on July 14, 2025, at the Regulators Roundtable on Financial Markets Innovation and Supervision of Emergent Technology, Johnson discussed international cybersecurity defenses and protocols, highlighting acute dangers in a heavily interdependent business world in which a contagion of breaches, or “domino effect,” is all too likely. She noted that the expertise and technology that firms leverage in the hope of shielding their own data and systems often fail to take account of the dangers that a breach might occur at the nexuses of interaction between a firm and a central counterparty or other vendor or service provider. The dangers of third-party exposure; failures of counterparty risk management; cross-border attacks and breaches; and the growing use of IT infiltrators and artificial intelligence on the part of rogue states, hackers and other bad actors are all issues of grave concern and call for improving third-party risk management; bolstering cross-border regulatory and enforcement efforts; and sharing of actionable threat intelligence among firms, she argued. This article covers key takeaways from Johnson’s remarks with practical commentary on insider threats, third-party risk mitigation and incident preparation and response from cybersecurity experts at Debevoise & Plimpton and Otterbourg. See “CFTC Advisory Cautions Firms to Remain Compliant When Deploying AI” (Aug. 14, 2025).

First Circuit Holds Materiality of Omissions From Certain Conflicts Disclosures Is a Jury Issue

In August 2019, the SEC filed a civil enforcement complaint against a dually registered investment adviser and broker-dealer in the U.S. District Court for the District of Massachusetts (District Court). The SEC alleged that the adviser failed to adequately disclose potential conflicts of interest arising out of receipt of revenue from a clearing broker in connection with its sales of mutual funds. In April 2023, the District Court granted the SEC’s motion for summary judgment as to liability, ruling that omissions from the adviser’s conflicts disclosures were material as a matter of law. In March 2024, it entered a judgment (Final Judgment) against the adviser for more than $93 million. On April 1, 2025, however, the U.S. Court of Appeals for the First Circuit issued an opinion (Opinion) vacating the District Court’s liability judgment and the Final Judgment, ruling that whether those omissions were material was a question for a jury. This article discusses the facts underlying the litigation and the Opinion, which may have implications for how the SEC handles future conflicts disclosure-related litigation, including cases involving hedge fund managers. See “Despite End of Share Class Selection Disclosure Initiative, SEC Continues Pursuit of Violators” (Jul. 16, 2020).

Hedge Fund Lawyer Robert G. Leonard Moves to K&L Gates

K&L Gates welcomed Robert G. Leonard as a partner in its asset management and investment funds practice in the firm’s New York office. Leonard advises clients on the structuring and organization of various master-feeder, side-by-side and mini-master-feeder funds, catering to hedge fund managers implementing various strategies. For insights from Leonard, see “Credit Suisse Survey Finds Greater Satisfaction With Hedge Fund Investments, Strong Demand for Equity Strategies and Growing Flexibility on Fee Structures” (Apr. 5, 2018). 

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Women to Watch: Contributions, Achievements and Observations of Outstanding Female Professionals

To mark International Women’s Day, women editors and reporters at ION Analytics interviewed outstanding women in the industries and jurisdictions we cover. In this part, Law Report Group editors Jill Abitbol, Robin L. Barton and Megan Zwiebel profile notable women in data privacy, cybersecurity, private funds and anti-corruption law, including Anne-Gabrielle Haie, Jessica Lee, Micaela McMurrough, Laura Perkins, Amanda Raad, Madelyn Calabrese, Ranah Esmaili and Genna Garver. Enjoy reading their inspiring remarks here.