Receipt of subpoenas from the SEC can rattle even the most time-tested hedge fund managers, particularly where there is little time to respond. The pressures created by an SEC investigation or enforcement action can lead to inadvertent disclosures of information or mistakes in judgment, which can result in a manager’s waiver of attorney-client privilege and other severe consequences. See generally “Are Hedge Fund Managers Required to Disclose the Existence or Outcome of Regulatory Examinations to Current or Potential Investors?
,” Hedge Fund Law Report, Vol. 4, No. 32 (Sep. 16, 2011). A recent federal court decision illustrates these risks. In that decision, the court held that a mutual fund adviser and another defendant waived their attorney-client privilege with respect to information inadvertently disclosed to the SEC in the course of an investigation and subsequent enforcement action. The court also ruled on whether the defendants made a broader subject matter waiver of the attorney-client privilege (with respect to yet-undisclosed information) in disclosing information to bolster affirmative defenses (based on the reliance of counsel and other professionals) in the course of the enforcement action. Although the case involves an adviser to a mutual fund, the risks, remedies and principles are equally applicable to hedge fund managers. This article summarizes the factual background in this case as well as the court’s ruling on the SEC’s motion to confirm that the defendants waived attorney-client privilege with respect to their actions. The article also outlines six recommendations for hedge fund managers seeking to preserve the attorney-client privilege when faced with SEC document requests.