The Hedge Fund Law Report

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

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By Topic: Electronic Communications

  • From Vol. 10 No.50 (Dec. 21, 2017)

    Electronic Signatures: Implementation Considerations for Fund Managers (Part One of Two)

    Electronic signatures have become a popular method to efficiently execute documents, and the U.S. laws governing them are more than 15 years old. Fund managers are increasingly relying on electronic signatures for agreements with third-party vendors, as well as in certain operating and offering documents, such as subscription agreements. Nevertheless, understanding when and how an electronic signature works in the contracting process and navigating the variety of available technologies remain perplexing given that fund managers, along with the rest of the financial services sector, are governed by a complex regulatory backdrop. In this guest article, the first part of a two-part series on electronic signatures, Julia B. Jacobson and Madeline A. Lally, partner and associate, respectively, at K&L Gates, discuss the legal landscape for electronic signatures, how an electronic signature differs from a digital one and the legal risks associated with the use of electronic signatures. The second article will include practical advice from other lawyers and consultants on how to implement an e‑signatures program while avoiding risks and how to vet and use vendors that provide these services. For additional insight from K&L Gates attorneys, see our two-part series on state and local pay to play laws: “State and Local Lobbying; Pay to Play; and Gifts and Entertainment Limitations” (Mar. 23, 2017); and “Public Disclosure Risks Associated With Accepting State and Public Pensions As Investors and How to Mitigate Them” (Mar. 30, 2017). See also “SEC Tackles Internal Cybersecurity Issues While Sharpening Cybersecurity Enforcement Focus” (Oct. 5, 2017); and “Practical Steps That Commodity-Focused Hedge Fund Managers Can Take to Combat Cybersecurity Threats” (Mar. 10, 2016).

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  • From Vol. 10 No.49 (Dec. 14, 2017)

    Are Hedge Fund Managers Controlling the Message? Six Key Issues to Address in Electronic Communication Policies and Guidance on Preparing for Future Scrutiny of Electronic Messaging (Part Three of Three)

    While the convenience of communicating through electronic messaging is undeniable, also irrefutable are the regulatory and legal risks posed to investment advisers, particularly when their employees use unapproved electronic messaging platforms. Compliance officers must walk a fine line between adopting policies and controls adequately tailored to mitigate the relevant risks posed by electronic communications and imposing overly restrictive measures that would hamper employees’ ability to efficiently and productively conduct business. This final article in our three-part series examines six core components that advisers should consider including in their electronic communication policies, taking into account the records requested in the “Information Request List” (Request List) purportedly being used by the SEC in connection with electronic communication-focused examinations of investment advisers, as well as six steps that advisers can take to proactively prepare for future scrutiny. The first article provided background on sweep exams, with particular focus on the ostensible electronic messaging exam and the potential drivers of SEC focus in this area. The second article explored the various components of the Request List and analyzed the implications and consequences of certain requests. For more on designing risk-based policies and procedures, see “Will Inadequate Policies and Procedures Be the Next Major Focus for SEC Enforcement Actions?” (Nov. 30, 2017); “General Insider Trading Policies and Procedures May Be Insufficient for Hedge Fund Managers to Avert SEC Enforcement Action” (Nov. 3, 2016); and “Investment Adviser Penalized for Weak Cyber Policies; OCIE Issues Investor Alert” (Oct. 1, 2015).

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  • From Vol. 10 No.48 (Dec. 7, 2017)

    Are Hedge Fund Managers Heeding the Message? Information Request List Provides Insight Into SEC Expectations on the Use of Electronic Communications by Advisers and Employees (Part Two of Three)

    Investment advisers frequently use SEC document request lists – either released by the SEC’s Office of Compliance Inspections and Examinations (OCIE) or disseminated by examinees or third parties – to test their ability to efficiently produce documents that may be requested during an actual SEC examination. A document entitled “Information Request List” (Request List), rumored as being used by the SEC to request records in connection with adviser examinations focused on the use of electronic communications by advisers and their employees, has made its way into the public domain. Despite a lack of official confirmation, industry experts that routinely assist clients with SEC examinations agree that the Request List’s substance and form closely resemble those of information requests routinely sent by OCIE. This second article in our three-part series explores the various components of the Request List and analyzes the implications and consequences of certain requests therein. The first article provided background on sweep exams, with particular focus on the putative electronic messaging examination and the potential drivers of SEC focus in this area. The third article will examine best practices for advisers when designing their electronic communications policies, taking into account the items requested in the Request List, as well as how advisers can proactively prepare for future scrutiny in this area. For more on preparing for SEC examinations, see “Mock Audits Are Essential Preparatory Tools for Fund Principals in the Current Regulatory Environment” (Sep. 28, 2017); and “What Hedge Fund Managers Can Expect From SEC Remote Examinations (Part One of Two)” (May 2, 2016).

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  • From Vol. 10 No.47 (Nov. 30, 2017)

    Are Hedge Fund Managers Receiving the Message? SEC Takes Steps to Drill Down on Electronic Communications (Part One of Three)

    Earlier in 2017, the SEC’s Office of Compliance Inspections and Examinations examined a handful of investment advisers, focusing on the forms of electronic communications used by those advisers and their employees. Many speculate that these exams were part of a new sweep exam focused on electronic messaging. Meanwhile, an official-seeming information request list (Request List) became public, although the SEC has not formally confirmed the existence of an electronic communications sweep exam nor the authenticity of the Request List. This three-part series is designed to assist compliance professionals with managing the ever-evolving electronic communication technologies that many adviser employees are already using, or desire to use, in their daily business practices. Given the widespread belief that these electronic communication-focused exams are part of a sweep exam, this first article provides background on sweep exams, with particular focus on this electronic messaging exam and the potential drivers of SEC focus in this area. The second article will break down the various components of the Request List and analyze the implications and consequences of certain requests. The third article will examine best practices for advisers when designing their electronic communications policies, taking into account the items requested in the Request List, as well as how advisers that are not the subject of the electronic communications exam can nonetheless proactively prepare for future scrutiny in this area. For more on electronic communications, see “ACA 2015 Compliance Survey Covers Expert Networks, Fund Expenses and Electronic Communications (Part Two of Two)” (Oct. 8, 2015); and “Survey Highlights Compliance Professionals’ Attitudes and Practices Concerning Electronic Communications Compliance” (Feb. 9, 2012).

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  • From Vol. 10 No.46 (Nov. 23, 2017)

    ECHR Decision Imposes New Criteria for Email Monitoring Practices on Fund Managers With European Operations

    The Grand Chamber of the European Court of Human Rights has sided with an employee who claimed his privacy rights were violated, setting out criteria for national courts to consider when evaluating whether companies, including fund managers, have safeguarded employees’ rights to privacy. In light of this decision, fund managers operating in the 47 jurisdictions that are parties to the European Convention on Human Rights should revisit their policies for monitoring their employees’ communications. This article analyzes the implications of the decision, including how it aligns with other national laws, and presents insights from practitioners with expertise in data privacy. See our three-part series on employee privacy issues relevant to hedge fund managers: “Reconciling Effective Monitoring of Electronic Communications With Employees’ Privacy Rights” (Apr. 4, 2014); “Reconciling Conflicting Sources of Privacy Rights of Employees” (Apr. 11, 2014); and “Six Privacy-Related Topics to Be Covered By Compliance Policies and Procedures” (May 23, 2014).

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  • From Vol. 10 No.40 (Oct. 12, 2017)

    Steps an Exempt Reporting Adviser Must Take to Transition to SEC Registered Investment Adviser Status: Adopting Compliance Policies and Procedures (Part Two of Three)

    Designing compliance policies and procedures that are appropriately tailored to a private fund adviser’s risks is a critical component of a compliance program for an SEC registered investment adviser (RIA). Exempt reporting advisers (ERAs) transitioning to RIA status that have not already devoted the time and resources to developing these policies and procedures will likely find this to be the most time-consuming aspect of the registration process. To assist ERAs with the creation and implementation of appropriate compliance policies and procedures, this second article in our three-part series outlines key policies and procedures that ERAs should consider when drafting their compliance manuals. The first article discussed the circumstances under which an ERA would be required to switch to SEC registration, along with considerations for ERAs building out their compliance programs. The third article will review the regulatory filings required to be filed by RIAs, amendments that ERAs may need to make to their fund offering documents in anticipation of their change in registration status, as well as guidance as to what newly registered advisers should expect from the SEC examination process. See “Hedge Fund Manager Deerfield Fined $4.7 Million for Failing to Adopt Insider Trading Compliance Policies Tailored to the Firm’s Specific Risks” (Sep. 21, 2017).

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  • From Vol. 10 No.40 (Oct. 12, 2017)

    Compliance Corner Q4-2017: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

    While the fourth quarter is often the busiest one for regulatory filings and fulfilling other compliance obligations, hedge fund managers should ensure that their compliance programs finish the year on a strong note and that key compliance processes are not neglected. This second installment of The Hedge Fund Law Report’s quarterly compliance update, authored by Danielle Joseph and Anne Wallace, director and analyst, respectively, at ACA Compliance Group, highlights certain notable regulatory filings fund managers need to address in the fourth quarter of 2017. In addition to the filing obligations discussed herein, this article examines recent actions by the SEC relating to virtual currency and electronic communications, along with their potential impact on advisers’ compliance programs. For other recent commentary from the SEC, see “SEC Chair Clayton Details Eight Guiding Principles for Enforcement and Agency Strategies for Their Implementation” (Aug. 10, 2017); and “SEC Chair’s Budget Testimony Emphasizes Strong Agency Focus on Oversight and Enforcement in Trump Era” (Jul. 13, 2017). For additional insights from Joseph, see our two-part series “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices”: Part One (Oct. 3, 2013); and Part Two (Oct. 11, 2013).

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  • From Vol. 10 No.38 (Sep. 28, 2017)

    ECHR Decision Imposes New Criteria for Email Monitoring Practices on Fund Managers With European Operations

    The Grand Chamber of the European Court of Human Rights has sided with an employee who claimed his privacy rights were violated, setting out criteria for national courts to consider when evaluating whether companies, including fund managers, have safeguarded employees’ rights to privacy. In light of this decision, fund managers operating in the 47 jurisdictions that are parties to the European Convention on Human Rights should revisit their policies for monitoring employees’ communications. This article analyzes the implications of the decision, including how it aligns with other national laws, and presents insights from practitioners with expertise in data privacy. See our three-part series on employee privacy issues relevant to hedge fund managers: “Reconciling Effective Monitoring of Electronic Communications With Employees’ Privacy Rights” (Apr. 4, 2014); “Reconciling Conflicting Sources of Privacy Rights of Employees” (Apr. 11, 2014); and “Six Privacy-Related Topics to Be Covered By Compliance Policies and Procedures” (May 23, 2014).

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  • From Vol. 10 No.28 (Jul. 13, 2017)

    Tips and Warnings for Navigating the Big Data Minefield

    Data-gathering and analytics have become valuable tools for private fund managers when making their investment decisions. As technology outpaces the law in this area, however, managers must use caution when acquiring and using data. See “Best Practices for Private Fund Advisers to Manage the Risks of Big Data and Web Scraping” (Jun. 15, 2017). A recent presentation featuring Proskauer partners Robert G. Leonard, Jeffrey D. Neuburger, Joshua M. Newville and Jonathan E. Richman discussed the evolving methods of collecting data, the risks involved and the ways managers can use big data without running afoul of applicable law. This article summarizes the panelists’ insights. For more from Leonard, see “How Fund Managers Can Prevent or Remedy Improper Fee and Expense Allocations (Part Three of Three)” (Sep. 15, 2016); and “Swiss Hedge Fund Marketing Regulations, BEA Forms and Form ADV Updates: An Interview With Proskauer Partner Robert Leonard” (Mar. 5, 2015).

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  • From Vol. 9 No.44 (Nov. 10, 2016)

    In Deutsche Bank Case, SEC Emphasizes Protecting Information From More Than Just Cyber Threats

    While regulators and companies have focused on cybersecurity efforts to keep data secure, the SEC’s recent administrative proceeding against Deutsche Bank Securities Inc. (DBSI) emphasizes that policies and practices to secure data must also safeguard material nonpublic information (MNPI) – including information generated by research analysts – from being disseminated, including via emails, chats, telephone calls and in-person meetings. See “Selective Dissemination of Research Through Surveys, Trade Ideas Platforms, Huddles and Desk Research: What Are the Implications for Hedge Funds?” (Aug. 2, 2012). The SEC’s order explains that DBSI has agreed to pay a $9.5 million penalty for (1) failing to properly safeguard MNPI generated by its research analysts; (2) publishing an improper research report; and (3) failing to properly preserve and provide electronic chat records sought by the SEC. This article explores the lessons about securing MNPI that hedge fund managers and other financial services companies can glean from the DBSI action. For more on insider trading, see “Hedge Funds in the Crosshairs: The Law of Insider Trading in an Active Enforcement Environment” (Feb. 17, 2010); “Perils Across the Pond: Understanding the Differences Between U.S. and U.K. Insider Trading Regulation” (Nov.  9, 2012); as well as our two-part series “How Can Hedge Fund Managers Apply the Law of Insider Trading to Address Hedge Fund Industry-Specific Insider Trading Risks?”: Part One (Aug. 7, 2013); and Part Two (Aug. 15, 2013). For additional coverage of the SEC’s action against DBSI, see “SEC Action Emphasizes Importance of Safeguarding Analyst Reports and Opinions From Improper Disclosure” (Oct. 20, 2016).

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  • From Vol. 9 No.42 (Oct. 27, 2016)

    Attorney-Consultant Privilege? Practical Tips for Preparing an Engagement Letter for, and Implementing, a Compliant Kovel Arrangement (Part Two of Three)

    The decision by a fund manager and its legal counsel to extend the attorney-client privilege to a consultant relationship through a so-called “Kovel arrangement” is only the first step in a complicated process. The next and most important step is ensuring that the entire Kovel engagement is performed correctly so the privilege will be recognized by the SEC, other regulators and the court system. If the arrangement is deemed invalid, the fund manager could be exposed to liability when documents detailing its operational deficiencies are made available to regulators or litigants. This article, the second in a three-part series, provides practical guidance regarding the provisions that need to be included in an engagement letter with a consultant and how the parties must maintain the arrangement on a daily basis in order to ensure it remains Kovel-compliant. The first article in this series detailed the legal requirements of the Kovel doctrine, as well as considerations for fund managers when deciding whether to invoke or waive the privilege. The third article will examine circumstances under which it is and is not appropriate for fund managers to employ Kovel arrangements. For more on the attorney-client privilege, see “Federal Court Decision Narrows the Scope of Attorney-Client Privilege Available to Hedge Fund Managers in Internal Investigations” (Jan. 23, 2014); and “Six Recommendations for Hedge Fund Managers Seeking to Protect Themselves From Waiver of Attorney-Client Privilege When Faced With SEC Document Requests” (Jan. 17, 2013).

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  • From Vol. 9 No.24 (Jun. 16, 2016)

    SEC Chair’s Testimony Highlights SEC’s Bolstered Presence in Asset Management Space

    The Securities and Exchange Commission reached the end of 2015 with a record number of examinations completed and a significantly enhanced presence in several key areas of asset management. See “OCIE Outlines Examination Priorities for 2016” (Jan. 14, 2016). But the Commission’s progress to promote compliance with securities laws and greater transparency and fairness for investors may be stunted by insufficient resources. This point was made by SEC Chair Mary Jo White during her June 14 testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. This article highlights the portions of White’s testimony most relevant to hedge fund managers. For analysis of prior public statements by White regarding hedge fund issues, see “SEC Chair Outlines Expectations for Fund Directors” (Apr. 7, 2016); “SEC Chair Highlights Two Types of Risks Hedge Fund Managers Must Consider” (Oct. 29, 2015); and “SEC Chair White Describes the SEC’s Game Plan With Respect to the Asset Management Industry” (Dec. 18, 2014).

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  • From Vol. 9 No.19 (May 12, 2016)

    Business Emails Must Be Secure to Avoid SEC Enforcement Action 

    As it continues to enforce appropriate cybersecurity controls, the SEC initiated administrative proceedings against broker-dealer Craig Scott Capital and its principals for failing to protect confidential consumer information by using personal email addresses for business matters. “The enforcement action, including the fines imposed, reflects how seriously the SEC takes the adoption of and compliance with proper policies and procedures,” Anastasia Rockas, a partner at Skadden, told The Hedge Fund Law Report. This enforcement action is particularly relevant to any hedge fund manager that: has an in-house broker-dealer; has high net worth individuals as clients; manages alternative mutual funds and thus has retail investors; or is subject to any look-through of its institutional clients to underlying individual investors. However, all hedge fund managers should pay close attention given that, as Rockas noted, the “SEC has indicated there will be additional enforcement actions in this space and has designated cybersecurity as an examination priority for 2016.” See “OCIE Risk Alert Provides Cybersecurity Guidance to Investment Advisers and Broker-Dealers” (Sep. 24, 2015). For another case involving penalties for inadequate cybersecurity controls, see “Investment Adviser Penalized for Weak Cyber Policies; OCIE Issues Investor Alert” (Oct. 1, 2015).

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  • From Vol. 8 No.39 (Oct. 8, 2015)

    ACA 2015 Compliance Survey Covers Expert Networks, Fund Expenses and Electronic Communications (Part Two of Two)

    ACA Compliance Group recently released the results of its 2015 Alternative Fund Manager Compliance Survey, which considered a variety of compliance issues faced by hedge fund managers and other private fund managers.  The survey results and comparisons to those of the firm’s prior surveys were presented at a recent webinar by Colleen Marencik, a senior principal consultant at ACA Compliance Group, and Tessa Carbone, a consultant at that firm.  This article, the second in a two-part series, summarizes the key findings from the survey and the insights offered by Carbone and Marencik with respect to expert networks and consultants, fund expenses and electronic communications.  The first article addressed the survey demographics, SEC exam experiences, material nonpublic information and restricted lists.  For coverage of prior ACA surveys, see “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013); and “ACA Compliance Group Survey Provides Benchmarks for a Range of Hedge Fund Manager Compliance Functions, Including Dual-Hatting, Annual Compliance Reviews, Forensic Testing, Custody, Fees and Signature Authority,” The Hedge Fund Law Report, Vol. 6, No. 19 (May 9, 2013).

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  • From Vol. 8 No.3 (Jan. 22, 2015)

    Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss Handling Regulatory Examinations and Mitigating Cybersecurity Risks (Part One of Four)

    Participants at the Eighth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM, zeroed in on the key compliance issues currently facing the hedge fund industry.  This article, the first in a four-part series covering the Summit, contains insight on regulatory priorities, handling regulatory examinations and cybersecurity preparedness from Andrew Bowden, a director at the SEC’s Office of Compliance Inspections and Examinations; Dianne Mattioli, CCO at Hedgemark; Larry Block, managing director, counsel and CCO at Island Capital Group LLC; Cynthia Marian, vice president, CCO and deputy general counsel at Tinicum Inc.; and David Lashway, a partner at Baker & McKenzie LLP.  Future installments in the series will cover: CFTC compliance; proposed changes to Form 13F and Schedule 13D; employment-related disputes with highly compensated employees; conflicting regulatory regimes; marketing considerations; insider trading; negotiating terms with institutional investors; negotiating seeding arrangements; and the convergence of mutual funds and hedge funds.  The HFLR has covered this annual event in each of the five prior years.  For our previous coverage, see: 2013 Part 3; 2013 Part 2; 2013 Part 1; 2012 Part 2; 2012 Part 1; 2011; 2010; and 2009.

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  • From Vol. 7 No.20 (May 23, 2014)

    Six Privacy-Related Topics to Be Covered by a Hedge Fund Manager’s Compliance Policies and Procedures (Part Three of Three)

    This is the final article in our three-part series on employee privacy issues relevant to hedge fund managers.  The first article in this series made the case, using examples, for why hedge fund managers should care about employee privacy.  See “How Can Hedge Fund Managers Reconcile Effective Monitoring of Electronic Communications with Employees’ Privacy Rights? (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 13 (Apr. 4, 2014).  The second article in this series identified the five primary sources of employee privacy rights.  See “Three Best Practices for Reconciling the Often Conflicting Sources of Privacy Rights of Hedge Fund Manager Employees (Part Two of Three),” The Hedge Fund Law Report, Vol. 7, No. 14 (Apr. 11, 2014).  This article discusses six topics that hedge fund managers should cover in their compliance policies and procedures under the general rubric of employee privacy.  The overarching aim of this series is to assist managers in calibrating and communicating their employees’ expectations of privacy – particularly in connection with electronic communications – in a manner consistent with best practices, relevant law and expectations of SEC examiners.

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  • From Vol. 7 No.20 (May 23, 2014)

    The 1992 ISDA Master Agreement Says Notice Can Be Given Using an “Electronic Messaging System”; If You Think That Means “E-Mail,” Think Again

    That was the conclusion in a case decided last month by the High Court of England and Wales.  In a guest article, Anne E. Beaumont, a partner at Friedman Kaplan Seiler & Adelman LLP, discusses the court’s decision, the definition of an “electronic messaging system” under the 1992 ISDA Master Agreement, the significance of the decision for users of New York-law ISDA Master Agreements and how to provide for e-mail notice.  For related analysis by Beaumont, see “Five Steps for Proactively Managing OTC Derivatives Documentation Risk,” The Hedge Fund Law Report, Vol. 7, No. 16 (Apr. 25, 2014).

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  • From Vol. 7 No.14 (Apr. 11, 2014)

    Three Best Practices for Reconciling the Often Conflicting Sources of Privacy Rights of Hedge Fund Manager Employees (Part Two of Three)

    This is the second article in our three-part series guiding hedge fund managers through the motley patchwork of authority governing employee privacy rights and employer privacy obligations.  The crux of the challenge is as follows: securities regulation and best practices require hedge fund managers to exercise considerable vigilance over employee communications.  To cite one headline example, a hedge fund management company can be held criminally liable for failing to adequately supervise employees that engaged in insider trading, and the DOJ and SEC understand adequate supervision to include continuous and vigorous monitoring of e-mails, chats and other electronic communications.  On the other hand, non-securities regulation and other authority grant employees certain privacy rights in their electronic and other communications.  How can hedge fund managers comply with applicable securities regulation while also complying with applicable privacy regulation – especially where the two regimes conflict?  Outlining an answer to that question is the goal of this series.  This article discusses the five primary sources of employee privacy rights, then offers three best practices for reconciling these often conflicting sources.  The first article in this series detailed six reasons why hedge fund managers need to monitor electronic communications of employees and highlighted two settings in which procedures other than electronic communication monitoring are most effective.  See “How Can Hedge Fund Managers Reconcile Effective Monitoring of Electronic Communications with Employees’ Privacy Rights? (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 13 (Apr. 4, 2014).  The third article will describe factors bearing on the reasonableness of an employee’s expectation of privacy, the benefits and limits of specific policies regarding electronic communication monitoring and best practices in this area.

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  • From Vol. 7 No.13 (Apr. 4, 2014)

    How Can Hedge Fund Managers Reconcile Effective Monitoring of Electronic Communications with Employees’ Privacy Rights? (Part One of Three)

    Information is the raw material out of which hedge fund managers fashion their finished products – compelling investment ideas and, one hopes, absolute returns.  As such, managers and their personnel are continuously engaged in collecting, refining and transmitting information, that is, communicating.  Today, the vast majority of such communications occur electronically – via e-mail, chat, text, social media and similar channels.  From an investment perspective, this increases opportunities but at the same time competition.  From a compliance perspective, the proliferation of electronic communications has dramatically expanded the range of opportunities for legal and regulatory violations.  Hedge fund managers are not unique among businesses in contending with the compliance challenges raised by electronic communications, but many of the specific compliance challenges faced by hedge fund managers are industry-specific.  Accordingly, The Hedge Fund Law Report is undertaking a three-part series intended to identify the specific compliance challenges for hedge fund managers raised by electronic communications and to outline best practices for surmounting those challenges.  This article – the first in the series – catalogues six reasons why hedge fund managers need to monitor electronic communications of employees and highlights two settings in which procedures other than electronic communication monitoring are most effective.  Subsequent articles in the series will discuss the sources of employees’ privacy rights, factors bearing on the reasonableness of an employee’s expectation of privacy, the benefits and limits of specific policies regarding electronic communication monitoring and best practices in this area.  See also “Key Elements of Electronic Communications Policies and Procedures for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 3, No. 44 (Nov. 12, 2010).

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  • From Vol. 7 No.12 (Mar. 28, 2014)

    Four Imminent Changes to E.U. Data Protection Laws of which Private Fund Managers Should Be Aware

    Private fund managers with any nexus to the E.U. should care about European data protection laws for two broad categories of reasons: because such laws may impact compliance policies and procedures and other operations at the management company itself, and because such laws may impact companies in which managers’ funds invest.  The latter point typically applies differently to hedge and private equity fund managers.  For hedge fund managers, data privacy laws can create buying or selling opportunities (in the presence of dramatic violations, analogous to the Target data breach in the U.S.), can offer a proxy for the general corporate governance climate at an investee company and are engendering the creation of a new (albeit limited) industry focused on compliance.  For private equity fund managers, data protection laws will typically raise costs at European portfolio companies, and – the other side of the cost coin – offer opportunities to reduce per unit costs via economies of scale spread over multiple portfolio companies.  This article offers a short but pointed summary of some of the key elements of E.U. data protection law currently in force, and highlights four forthcoming changes that will alter the contours of that law and the way private fund managers interact with it.  For discussions of separate sets of considerations for U.S. managers with E.U. operations, see “What Should Hedge Fund Managers Understand About Transfer Pricing and How to Manage the Related Risks?,” The Hedge Fund Law Report, Vol. 6, No. 42 (Nov. 1, 2013) (transfer pricing considerations for U.S. managers with London or E.U. affiliates); “Potential Impact on US Hedge Fund Managers of the Reform of the UK Tax Regime Relating to Partnerships and Limited Liability Partnerships,” The Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014) (U.K. tax considerations for U.S. managers); “Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013) (AIFMD considerations for U.S. managers).

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  • From Vol. 7 No.11 (Mar. 21, 2014)

    Puffery or Securities Fraud?  Litvak Conviction Sheds Light on Permissible Bounds of Bond Sales Talk and the Evidentiary Power of Bloomberg Chats

    On March 7, 2014, a senior Jefferies & Co., Inc. (Jefferies) employee, Jesse C. Litvak, was convicted by a Connecticut jury of 15 counts of federal securities fraud and other violations arising out of the sales tactics he used in selling bonds.  Litvak was a licensed broker who was employed as a senior trader and managing director at Jefferies.  He specialized in trading residential mortgage-backed security (RMBS) bonds.  He sold RMBS bonds to customers that included U.S. government-sponsored Public-Private Investment Funds, which were established in 2009 and 2010 under the Troubled Asset Relief Program.  A March 12, 2014 panel discussion organized by the law firm Richards Kibbe & Orbe LLP (RKO) addressed the fraud allegations, the legal arguments adduced by the prosecution and defense and the lessons from Litvak’s conviction.  The panel featured RKO partners Lee Richards III, Daniel Stein and David Massey, all former Assistant U.S. Attorneys, and Michael Mann, a former SEC Director of the Office of International Affairs.  This article summarizes the main points from the discussion, which should inform interactions between hedge fund managers that trade fixed income securities and their brokers.  For additional insight from RKO partners, see “Succession Planning Series: Selling a Hedge Fund Founder’s Interest to an Outside Investor (Part Two of Two),” The Hedge Fund Law Report, Vol. 7, No. 2 (Jan. 16, 2014); “Convertible Preferred Stock: How Preferred Is It? (Part Two of Two),” The Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014); and “An Examination of Exit Rights for Hedge Funds Making Non-Controlling Private Equity Investments,” The Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).

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  • From Vol. 7 No.5 (Feb. 6, 2014)

    How Can Hedge Fund Managers Structure, Implement and Enforce Information Barriers to Mitigate Insider Trading Risk Without Impairing Securities Trading? (Part Four of Four)

    This is the fourth article in our four-part series on information barriers in the hedge fund context.  The series aims to help hedge fund managers determine whether they should use information barriers and, if so, how they can establish and enforce such barriers.  In particular, this fourth article discusses the role of employee training and compliance surveillance in the maintenance of robust information barriers, and describes four significant challenges faced by hedge fund managers in structuring, implementing and enforcing information barriers.  The first article provided an overview of various insider trading controls, including restricted lists, watch lists and information barriers, explaining how they can work together; described four principal benefits available from the use of information barriers; highlighted the types of firms that can benefit most from the implementation of information barriers; and described the types of firms that will find the implementation of information barriers most challenging.  The second article discussed the legal and regulatory basis for information barriers and described the building blocks of effective barriers (including the key players, physical components and technological processes).  The third article described how a firm can limit access to material nonpublic information within the information barrier control environment and outlined policies and procedures designed to bolster the effectiveness of information barriers.

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  • From Vol. 5 No.42 (Nov. 9, 2012)

    Competing Briefs in Rajaratnam Appeal Outline the Application of Wiretap Law to Hedge Fund Managers

    The use of wiretap evidence is the most important innovation in insider trading enforcement in the last five years, and nothing illustrates the evidentiary power of wiretap evidence as starkly as the Rajaratnam trial and conviction.  As the hedge fund industry well knows, on May 11, 2011, after a two-month trial, including 12 days of jury deliberations, Raj Rajaratnam, founder of hedge fund manager Galleon Group, was found guilty of nine counts of securities fraud and five conspiracy counts.  In October 2011, he was sentenced to 132 months in prison and ordered to pay a $10 million fine and to forfeit $53.8 million.  Prior to the Rajaratnam trial, most insider trading cases were based on circumstantial evidence.  But the case against Rajaratnam was based in large part on direct evidence – recordings of over 2,200 of Rajaratnam’s telephone conversations with more than 130 individuals.  As Rajaratnam’s defense team found, it is often difficult or impossible to rebut the validity of wiretap evidence.  Given the comprehensiveness of many wiretaps, it is even difficult in most cases to offer competing interpretations of the same wiretap.  There is no substitute from the prosecutor’s perspective – and little as damning – as a defendant explaining his bad acts in his own words.  Accordingly, the legal fight in connection with wiretaps often relates not to the content of the wiretap but to the validity of the wiretap in the first instance – and this is precisely the fight that Rajaratnam is waging in appealing his conviction to the Second Circuit.  Specifically, on appeal, Rajaratnam alleges that the government engaged in a flawed process in obtaining the warrant to wiretap his phones, and those flaws violated his Fourth Amendment rights as well as the federal wiretap statute.  Rajaratnam also challenges a jury instruction relating to the insider trading charges.  This article provides a feature-length analysis of Rajaratnam’s appeal brief and the government’s reply brief.  In doing so, this article provides a comprehensive view of the law governing wiretaps.  For hedge fund managers, general counsels, outside counsel, compliance officers, portfolio managers and others, it is now important to understand this area of law – an area previously applicable primarily in organized crime and conspiracy cases.  Understanding the law of wiretaps is important for many reasons.  Most notably, if the government wiretaps you or one of your portfolio managers, and if the wiretap bears fruit, there is a good chance that the government will approach you about settling before initiating a formal criminal matter.  If you understand the law of wiretaps – particularly if you can identify any infirmities in the process by which the government obtained its warrant – you will have a significant bargaining advantage vis-à-vis an investment management lawyer that is not conversant with this niche of criminal procedure.  You can hire a good white collar lawyer, of course, but if you understand this area, you will know what to ask and better appreciate the answers.  Our review of the appellate papers in the Rajaratnam matter is intended to highlight the primary legal considerations for the growing number of hedge fund industry participants that are concerned with wiretaps but that are not experts in criminal law and procedure.

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  • From Vol. 5 No.17 (Apr. 26, 2012)

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

    For hedge fund managers, mobile devices are pervasive, unavoidable, valuable and dangerous.  Substantially everyone that works at a hedge fund management company has some sort of mobile device – personal or company-issued or both – and those devices are becoming more sophisticated every day.  On the positive side, mobile devices can raze the obstacles created by time and place; they enable employees to be productive on the go or at off hours.  But on the negative side, mobile devices introduce a number of competitive and regulatory challenges for hedge fund managers: they increase the odds that confidential data will leak; they facilitate the knowing or negligent misuse of material nonpublic information; they raise questions with regard to recordkeeping obligations; and so on.  This article is the last in a three-part series intended to help hedge fund managers identify and address – via policies, procedures and technology – the thorniest business and legal questions raised by mobile devices.  The first article in this series highlighted the risks to hedge fund managers posed by mobile devices, including susceptibility of critical information to leakage or theft, unauthorized trading, penetration of systems by malware and viruses and other potential harms.  See “What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed? (Part One of Three),” The Hedge Fund Law Report, Vol. 5, No. 15 (Apr. 12, 2012).  The second article offered concrete suggestions on how hedge fund managers can anticipate and address those risks using policies, procedures and technology solutions.  Specifically, that second article identified three suggested steps that managers should take before crafting their mobile device policies and procedures, and made specific recommendations regarding the content of such policies and procedures.  See “What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed? (Part Two of Three),” The Hedge Fund Law Report. Vol. 5, No. 16 (Apr. 19, 2012).  This article discusses additional specific suggestions on crafting policies and procedures and deploying technology to address the risks posed by mobile devices.  In particular, this article details: how hedge fund managers can prevent access to data on mobile devices by unauthorized persons; how managers may prevent firm personnel from exceeding authorized levels of data access; technology solutions for monitoring mobile devices; archiving data on mobile devices to comply with books and records policies and laws; and policies governing social media access via mobile devices.  See “SEC Risk Alert Discusses When Social Media Interactions May Constitute Prohibited Hedge Fund Client Testimonials,” The Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012).

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  • From Vol. 5 No.16 (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),” The 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.

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  • From Vol. 5 No.15 (Apr. 12, 2012)

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

    Mobile devices, such as smartphones and tablet computers, have significantly enhanced the ability of hedge fund managers and their personnel to conduct business more effectively and efficiently by, among other things, facilitating performance of job functions outside of the office.  However, such productivity gains come at a cost.  The ability to remotely access firm networks and information via mobile devices magnifies the risk of losing some control over access to firm information and firm systems.  Such loss of control can, in turn, create additional perils, most notably, security concerns for hedge fund managers who closely guard any informational advantage they have over competitors.  Additionally, such loss of control over access may heighten risks that a firm’s network is compromised, which can cause significant damage to a firm’s operations.  As such, it is imperative for hedge fund managers to keep up with the ever-growing risks that arise from the rapidly evolving mobile device technology landscape and to adopt policies and solutions designed to minimize the loss of control over access to firm information and systems.  This is the first article in a three-part series designed to address the concerns raised by mobile devices and to outline policies and procedures as well as technology solutions that can help hedge fund managers mitigate the risks posed by the use of mobile devices.  This first article provides an overview of the use of mobile devices and how hedge fund managers have historically addressed the use of mobile devices.  In particular, this article surveys the various risks for hedge fund managers raised by mobile devices, including security risks, risks related to unauthorized trading and risks related to the downloading of malware and viruses.  This article also addresses concerns relating to retention and archiving of books and records, and advertising and communications.  The second and third installments in this three-part series will discuss principles and detail best practices for establishing mobile device policies and procedures as well as specific mobile device solutions and technologies designed to address the risks catalogued in this article.

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  • From Vol. 5 No.6 (Feb. 9, 2012)

    Does Social Media Have a Place in the Hedge Fund Industry?

    While social media has captivated society and propelled it deeper into the communication age, the hedge fund industry has not yet embraced it on a meaningful scale.  See “Legal Considerations for Hedge Fund Managers that Use Social Media,” The Hedge Fund Law Report, Vol. 4, No. 14 (Apr. 29, 2011).  In fact, a recent survey of hedge fund managers found that the vast majority of hedge fund managers are simply not using social media.  On the one hand, it is surprising that hedge fund managers have been slow to explore social media given the otherwise cutting edge nature of the hedge fund industry.  On the other hand, many compliance professionals are simply stretched too thin by the introduction of new regulatory challenges arising from the Dodd-Frank Act, and thus are unable to devote resources to exploring this new frontier.  In reality, there appears to be very little dialogue regarding whether social media could be used effectively in the hedge fund industry, and if so, how to do so in compliance with applicable laws and regulations.  Therefore, in a guest article, John Herbert Roth, Counsel and Chief Compliance Officer of Venor Capital Management LP, initiates that dialogue by asking whether social media can have a place in the hedge fund industry, and then proposing a comprehensive framework within which hedge fund managers may think about social media and its compliance implications.  See also “SEC Enforcement Action and Bulletins Shine Spotlight on Use of Social Media by Investment Advisers,” The Hedge Fund Law Report, Vol. 5, No. 2 (Jan. 12, 2012).

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  • From Vol. 5 No.6 (Feb. 9, 2012)

    Survey Highlights Compliance Professionals’ Attitudes and Practices Concerning Electronic Communications Compliance

    Electronic communications compliance has become more important for hedge fund managers in recent years as the amount of business done electronically and the amount of regulatory focus on electronic communications compliance have grown significantly.  At the same time, compliance professionals have struggled to keep up with ever-changing circumstances that make electronic communications compliance, including the capture and archiving of electronic communications, even more difficult.  In May 2011, Smarsh, Inc. published a report (Report) that detailed the findings of a survey of compliance professionals at various types of financial institutions, including investment advisers and broker-dealers, designed to identify trends in and opinions about electronic communications compliance.  The survey comprised 29 questions which were asked of 223 individuals with direct compliance supervisory responsibilities, including C-level management personnel, chief compliance officers and compliance staff members.  This article summarizes some of the key findings of the Report and lessons for hedge fund managers.  See also “Does Social Media Have a Place in the Hedge Fund Industry?,” above, in this issue of The Hedge Fund Law Report.

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  • From Vol. 4 No.41 (Nov. 17, 2011)

    How Hedge Fund Managers Can Use Technology to Enhance Their Compliance Programs

    Heightened regulatory scrutiny and investor expectations in today’s hedge fund environment have prompted many fund managers to look to technology solutions to increase the effectiveness and efficiency of their compliance programs.  Lori Richards, principal of PricewaterhouseCoopers LLP (PWC) and former Director of the U.S. Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations, recently published a report (Report) entitled “Integrating technology into your compliance program to improve effectiveness and efficiency.”  The Report states that maintaining manual compliance processes can be time-consuming, costly and prone to error while technology enhancements can provide numerous benefits for a fund manager, including: enhancement of the efficiency, accuracy and consistency of data gathering; scalability of technology infrastructure for firm growth that is resistant to staff turnover; demonstration of a compliance culture to regulators and investors; reduction in the burden of inspections with easily generated reports; and overall cost efficiencies.  For a similar argument in favor of automation, see “Spreadsheets Can Stunt a Hedge Fund Manager’s Growth,” The Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011).  The Report also cautions that piecemeal automation of compliance processes can lead to nonintegrated systems that are costly to maintain and unable to provide a consolidated risk assessment across the firm.  Additionally, firms that do not appropriately utilize technological solutions to modernize their compliance programs may not be able to meet industry standard practices.  The crux of the Report surveys the types of technology solutions that can enhance a hedge fund manager’s compliance program and details the process fund managers should use in selecting vendors.  See “Hedge Fund-Specific Issues in Portfolio Management Software Agreements and Other Vendor Agreements,” The Hedge Fund Law Report, Vol. 4, No. 26 (Aug. 4, 2011).  This article details the contents of the Report and highlights the lessons most critical to hedge fund managers looking to apply best technology practices to their compliance policies and procedures.

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  • From Vol. 4 No.35 (Oct. 6, 2011)

    How Much Information Can a Hedge Fund Manager Include On a Public Website?

    On September 22, 2011, the Massachusetts Supreme Court issued an important decision dealing with how much information hedge fund managers may include on their public websites.  The answer seeks to balance the right on the part of individuals and entities to free speech with the right on the part of government to limit commercial speech.  The decision is important to hedge fund managers because the Internet is becoming a more central channel of hedge fund marketing.  Conveying the right amount of information in the right way can enhance marketing, but saying too much or saying it in the wrong way can lead to liability.  This decision helps establish parameters.  Our article provides an extensive analysis of the decision, the factual background and prior relevant decisions.

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  • From Vol. 4 No.30 (Sep. 1, 2011)

    Nine Steps That Hedge Fund Managers Should Take to Develop a Defensible Electronic Discovery Strategy

    Few hedge fund managers spend adequate time proactively considering the risks associated with electronic discovery (e-discovery) before they face a lawsuit or an investigation.  Then, when it is too late to be proactive, managers typically scramble and over-collect data, substantially increasing their e-discovery costs, or they miss data, leading to claims of spoliation and sanctions.  See “Pension Committee Case Highlights Obligations of Hedge Fund Managers to Preserve Documents and Information in Anticipation of Litigation,” The Hedge Fund Law Report, Vol. 3, No. 6 (Feb. 11, 2010).  While hedge fund managers have limited control over whether their funds or management companies are sued or audited, managers can adopt best practices that will help manage the risks and costs associated with e-discovery.  In a guest article, Jon Resnick, worldwide vice president of field operations at Applied Discovery, and Monte Mann, a partner at Novack and Macey LLP, describe nine categories of actions that hedge fund managers should take, and two categories of actions that hedge fund managers should avoid, to develop a sound, defensible e-discovery strategy.

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  • From Vol. 4 No.24 (Jul. 14, 2011)

    Will a Criminal Court Admit into Evidence a Recorded Telephone Conversation Between a Hedge Fund Manager Charged with Insider Trading and an Alleged Co-Conspirator?

    Much has been said of late about the new investigative and enforcement tools being used by the Securities and Exchange Commission (SEC), Department of Justice (DOJ) and Federal Bureau of Investigation (FBI) to combat insider trading.  See “The SEC’s New Focus on Insider Trading by Hedge Funds,” The Hedge Fund Law Report, Vol. 3, No. 22 (Jun. 3, 2010).  On the civil side, the SEC has restructured its Enforcement Division into industry units, hired former federal prosecutors to serve in the Enforcement Division, authorized Enforcement Division staff to enter into non-prosecution agreements and cooperation agreements and increased its use of technology to analyze trading trends for suspect patterns.  See “SEC’s Hedge Fund Focus to Include Review of Funds That Outperform the Market,” The Hedge Fund Law Report, Vol. 4, No. 14 (Apr. 29, 2011).  On the criminal side, the DOJ and FBI have incorporated into their anti-insider trading efforts tools formerly reserved for the investigation and prosecution of organized crime.  Most notably, the FBI is using wiretaps in its investigations of hedge fund managers for insider trading, and the DOJ is using the fruits of such wiretaps in its prosecutions.  The legal authority for the agencies to use wiretaps in the hedge fund context was affirmed in an important district court decision in November 2010.  See “Federal District Court Upholds the Government’s Right to Use Wiretaps to Investigate Suspected Insider Trading by Hedge Fund Manager Personnel,” The Hedge Fund Law Report, Vol. 3, No. 48 (Dec. 10, 2010).  And, of course, the most notable example (to date) of the government’s successful use of wiretap evidence in an insider trading prosecution in the hedge fund context was the May 11, 2011 conviction of Galleon Group founder Raj Rajaratnam.  See “Implications of the Rajaratnam Verdict for the ‘Mosaic Theory,’ the ‘Knowing Possession’ Standard of Insider Trading and Criminal Wire Fraud Liability in the Absence of a Trade,” The Hedge Fund Law Report, Vol. 4, No. 18 (Jun. 1, 2011).  Prior to the use of wiretap evidence in insider trading investigations and prosecutions, most insider trading cases were based on circumstantial evidence.  With the advent of the use of wiretap evidence in this context, insider trading cases can now be based on direct evidence.  As some white collar defense attorneys observed, although Rajaratnam elected not to take the stand at his own trial, he nonetheless served as the prosecution’s “star witness.”  Rajaratnam’s voice appeared in hours of recorded phone calls that were played for the jury, discussing what the prosecution characterized as material nonpublic information.  For the defense, these recordings proved insurmountable.  In short, wiretapping by the government has changed the landscape of insider trading law for hedge fund managers.  But the government is not the only party that records phone calls.  With a level of frequency that keeps white collar defense lawyers up at night – although some of them are up thinking about new business rather than worrying – hedge fund managers and other hedge fund industry participants record their own phone calls.  Often, they do this for what they consider practical reasons rather than for legal or regulatory reasons.  For example, a manager that submits frequent trade orders to its brokers may record calls to create a record for any dispute over a trade error.  Or a manager may record an analyst’s calls with an expert found via an expert network for compliance reasons.  However, in the current enforcement climate, any hedge fund manager that records its own phone calls must weigh the perceived benefits of such recordings against the possibility that recorded calls will be admitted into evidence (and invariably taken out of context) in a civil enforcement action or criminal prosecution.  A June 29, 2011 Opinion by U.S. District Court Judge Jed Rakoff illustrates the legal standards that govern admission of phone calls and other communications recorded by a hedge fund manager in a criminal proceeding against a third party alleged to have provided material nonpublic information to the manager.  For discussion of other opinions by Judge Rakoff in the hedge fund context, see “A Prime Broker that Fails to Diligently Investigate the Sources of Funds in a Hedge Fund’s Margin Account May Be Jointly and Severally Liable, with the Fund and Its Manager, for Fraud by the Manager, to the Extent of Funds in the Account,” The Hedge Fund Law Report, Vol. 3, No. 47 (Dec. 3, 2010); “In Refco Securities Litigation, Federal Court Declines to Impute the Bad Acts of Individual Directors of a Hedge Fund Management Company to the Management Company Itself, or its Funds,” The Hedge Fund Law Report, Vol. 4, No. 15 (May 6, 2011).

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  • From Vol. 3 No.44 (Nov. 12, 2010)

    Key Elements of Electronic Communications Policies and Procedures for Hedge Fund Managers

    Electronic communications technologies – phone, e-mail, instant messaging, social media and others described in this article – are essential to the efficient operations of hedge fund managers, but at the same time pose considerable regulatory and litigation, reputational and trading risks.  Hedge fund managers cannot live without electronic communications, but may not survive if such communications are not properly handled.  Moreover, electronic communications are among the most difficult categories of information to contain – they are indelible, pervasive and often determine the outcome of private and government litigation.  Yet more often than not, such communications are drafted under the mistaken impression that they are as easy to erase as they are to create.  Despite a lengthy list of cases illustrating the error in this view, hedge fund manager personnel continue to create and send electronic communications that would fail the commonly used litmus test: “If you wouldn’t want it on the cover of the Wall Street Journal, don’t send it.”  The intent of this article is to assist hedge fund managers in creating, refining and enforcing electronic communications policies and procedures.  To do so, this article first catalogues the various types of electronic communications technologies used by hedge fund manager personnel, as well as the categories of communications that may be made with such technologies.  Next, the article identifies specific risks arising out of the various communications and technologies.  Notably, the range of risks posed by electronic communications in the hedge fund context is significantly broader than the risk of embarrassment or bad evidence at trial – other risks relate to loss of trading advantages, insider trading charges, spoliation sanctions and more.  Incorporating the discussion of communications, technologies and risks, the article then discusses the key elements of electronic communications policies and procedures for hedge fund managers.

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  • From Vol. 3 No.41 (Oct. 22, 2010)

    Decision in the Galleon Matter Illustrates Application of Wiretap Law in the Hedge Fund Context

    On September 29, 2010, the U.S. Court of Appeals for the Second Circuit issued a writ of mandamus on behalf of Raj Rajaratnam, founder and general partner of Galleon Management, LP and Danielle Chiesi, former manager and consultant of New Castle Funds LLC (Defendants).  The writ vacated a discovery order of the U.S. District Court for the Southern District of New York that had required Defendants to disclose thousands of wiretaps to the Securities and Exchange Commission (SEC) as part of its civil enforcement action.  Defendants had obtained those wiretaps from the U.S. Attorney’s Office (USAO) in a parallel criminal action against them pursuant to Title III of the Omnibus Crime Control and Safe Streets Act of 1968 (18 U.S.C. §§2510-2522) (Title III or the Act).  Recognizing that the USAO had taken the position that the Act prohibits it from disclosing these wiretaps to the SEC, the Second Circuit held that the Act does not prohibit a federal court from ordering the Defendants to disclose that information during discovery in a civil action.  It reasoned that, in this instance, the district court clearly abused its discretion by issuing the order prior to a criminal court “ruling on the legality of the wiretaps and without limiting the disclosure to relevant considerations.”  We detail the background of the action and the Second Circuit’s legal analysis.

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  • From Vol. 3 No.35 (Sep. 10, 2010)

    Hedge Fund Manager Elliott Management Withdraws Petition Seeking Discovery from Absolute Return + Alpha Regarding Identity of Source of Leaked Investor Letter

    On August 31, 2010, hedge fund manager Elliott Management Corporation, along with its managed hedge funds Elliott Associates, L.P. and Elliott International, L.P. (collectively, Elliott), withdrew their petition seeking pre-litigation discovery from hedge fund industry publication Absolute Return + Alpha (Publisher).  Elliott had sought discovery regarding, among other things, the identity of a source that provided Elliott’s June 30, 2010 investor letter to the Publisher.  That copyrighted investor letter contained confidential information regarding Elliott’s investments, trading positions and performance, and Elliott argued in court papers that public disclosure of the information would undermine its negotiations with trading counterparties.  Accordingly, when the Publisher told Elliott that it was going to publish the letter, Elliott sought an emergency order permitting it to take a deposition of the Publisher and conduct other pre-action discovery to find the source of the disclosure.  In an unfiled affidavit, the Publisher argued, among other things, that the New York Reporter’s Shield Law provided it with an absolute privilege to report information obtained from a confidential source without revealing the identity of the source, even if the information was copyrighted and confidential. Although Elliott withdrew its petition before the court had an opportunity to issue a substantive opinion, the petition itself is noteworthy for various reasons.  First, it details five measures taken by a sophisticated hedge fund manager to protect the confidentiality of position and performance information in an investor letter.  (Those five measures are detailed in this article.)  Second, it illustrates the challenge faced by a manager in the event of an unauthorized disclosure of an investor letter.  Had the matter proceeded and had Elliott obtained the identity of the source, Elliott presumably would have faced the unpalatable option of suing one of its own investors for damages arising out of this disclosure (though any such damages would be hard to quantify) or an injunction against further disclosures of information in the June 30 letter or future letters.  Alternatively, or in addition, Elliott might have brought an action against the Publisher, though in the absence of a confidentiality agreement or any other relevant contract between Elliott and the Publisher, the basis of any such claim is not immediately apparent.  This article details the thorough and rigorous process that Elliott used to ensure the confidentiality of its investor letters, and the legal steps it undertook to maintain that confidentiality when, despite those efforts, the content of one of those letters leaked.

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  • From Vol. 3 No.33 (Aug. 20, 2010)

    From Philip Goldstein: Salem-Style Justice is Alive and Well in Massachusetts

    In social psychology, the “bystander effect” refers to the phenomenon in which no one person will help when a group of people witnesses a bad act.  And in economics, the free rider problem suggests that a person generally will avoid taking actions, even socially beneficial ones, where the person bears the cost of that action but the benefits are widely dispersed.  Both theories have been robustly proven in experiments and are generally applicable: most people are, quite rationally, bystanders and free riders.  But not Philip Goldstein.  The Principal of Bulldog Investors successfully challenged the 2004 hedge fund adviser registration rule, is currently challenging the constitutionality of Section 13(f) of the Securities Exchange Act of 1934 and is challenging an allegation by the Secretary of the Commonwealth of Massachusetts that the Bulldog website, together with an e-mail sent in response to an inquiry from a Massachusetts resident, constituted an illegal “offer” of unregistered securities.  On July 2, 2010, in the action brought by the Secretary, the Supreme Judicial Court (SJC) of Massachusetts ruled against Goldstein.  The Hedge Fund Law Report has published two articles on that decision.  See “Massachusetts High Court Rules that Website and Single E-Mail Communication to Massachusetts Resident Confer Personal Jurisdiction Over Philip Goldstein’s Hedge Fund Company in Administrative Proceeding,” The Hedge Fund Law Report, Vol. 3, No. 28 (Jul. 15, 2010); “The Bulldog Decision: Implications for Hedge Fund Managers and the Massachusetts Securities Division,” The Hedge Fund Law Report, Vol. 3, No. 32 (Aug. 13, 2010).  In this letter to the editor, Goldstein identifies and discusses shortcomings in the SJC’s legal analysis and in The Hedge Fund Law Report’s coverage of the case.

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  • From Vol. 3 No.32 (Aug. 13, 2010)

    The Bulldog Decision: Implications for Hedge Fund Managers and the Massachusetts Securities Division

    The Massachusetts Supreme Judicial Court’s recent decision in the case Bulldog Investors General Partnership, et al. v. Secretary of the Commonwealth has significant implications for hedge fund managers and the scope of authority of the Massachusetts Securities Division of the Secretary of the Commonwealth.  In Bulldog, the SJC found that: (1) Bulldog Investors General Partnership, a hedge fund manager, and its principals violated Massachusetts securities laws by offering unregistered securities to a Massachusetts resident via a single e-mail after he registered with Bulldog’s publicly accessible website; and (2) the Securities Division could exercise personal jurisdiction over non-residents Bulldog and its principals in administrative enforcement proceedings.  See “Massachusetts High Court Rules that Website and Single E-Mail Communication to Massachusetts Resident Confer Personal Jurisdiction Over Philip Goldstein’s Hedge Fund Company in Administrative Proceeding,” The Hedge Fund Law Report, Vol. 3, No. 28 (Jul. 15, 2010).  In a guest article, Michele Adelman and Catherine Karuga, Counsel and Associate, respectively, at Foley Hoag LLP, explain the factual background of the case and the court’s legal analysis, and offer several take-aways for hedge fund managers.

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  • From Vol. 3 No.28 (Jul. 15, 2010)

    Massachusetts High Court Rules that Website and Single E-Mail Communication to Massachusetts Resident Confer Personal Jurisdiction Over Philip Goldstein’s Hedge Fund Company in Administrative Proceeding

    Massachusetts’ highest court has dealt a blow to activist investor Philip Goldstein’s efforts to broaden the ability of hedge funds to disseminate information about their operations and performance.  Plaintiff Bulldog Investors General Partnership (Bulldog) had operated a website containing information about its investment products.  A visitor to the site could register and receive “more specific information” about Bulldog’s funds.  In November 2006, Massachusetts resident Brendan Hickey (Hickey) registered with the site.  A Bulldog employee then sent Hickey a single e-mail with detailed information about Bulldog’s funds and offered to discuss the funds by telephone.  As a result, in January 2007, the Securities Division of the office of the Secretary of the Commonwealth (Secretary) filed a complaint against Bulldog and certain employees and affiliates, accusing them of offering non-exempt, unregistered securities.  Bulldog contested the proceeding, arguing that the Secretary did not have personal jurisdiction over the named respondents, that the information provided did not constitute an “offer” under Massachusetts law and that the enforcement action violated the respondents’ rights to free speech.  The Supreme Judicial Court upheld the determination by the Secretary and lower court that jurisdiction was proper and that Bulldog’s e-mail to Hickey constituted an “offer” of unregistered securities under Massachusetts law.  Bulldog’s free speech claims are being heard in a separate proceeding.  We summarize the facts that gave rise to the administrative proceeding and the Court’s reasoning.

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  • From Vol. 3 No.24 (Jun. 18, 2010)

    How Can Hedge Fund Managers Accept ERISA Money Above the 25 Percent Threshold While Avoiding ERISA’s More Onerous Prohibited Transaction Provisions? (Part Three of Three)

    This is the third of three articles in a series intended to acquaint – or reacquaint – hedge fund managers, investors, service providers and others with the basic principles and prohibitions of, and exemptions from, the Employee Retirement Income Security Act of 1974 (ERISA).  The first article in this series explained how hedge fund managers can become – or avoid becoming – subject to ERISA.  That article focused primarily on the “25 percent test,” which generally provides that if benefit plan investors (e.g., corporate pension funds) own less than 25 percent of any class of equity interests issued by a hedge fund, the hedge fund manager will not be subject to ERISA.  See “How Can Hedge Fund Managers Accept ERISA Money Above the 25 Percent Threshold While Avoiding ERISA’s More Onerous Prohibited Transaction Provisions? (Part One of Three),” The Hedge Fund Law Report, Vol. 3, No. 19 (May 14, 2010).  The second article in the series detailed the consequences to a hedge fund manager of becoming subject to ERISA, which can happen, for example, if a large non-ERISA investor redeems, causing the proportionate ownership of benefit plan investors to exceed 25 percent of a class of equity interests.  Those consequences most notably include the imposition of a heightened fiduciary duty and a prohibition on many transactions between the hedge fund and “parties in interest” to a benefit plan invested in the hedge fund.  See “How Can Hedge Fund Managers Accept ERISA Money Above the 25 Percent Threshold While Avoiding ERISA’s More Onerous Prohibited Transaction Provisions? (Part Two of Three),” The Hedge Fund Law Report, Vol. 3, No. 20 (May 21, 2010).  As that second article noted, ERISA’s list of prohibited transactions is so long, and ERISA’s definition of “party in interest” (and the parallel definition of “disqualified person” under the Internal Revenue Code) so expansive, that strict compliance by investment managers with ERISA’s prohibited transaction provisions would undermine the basic purpose of ERISA; broadly, that purpose is to ensure the ethical, unconflicted and competent management of retiree money.  Accordingly, Congress (by statute) and the Department of Labor (by regulation and other action) have created a series of exemptions from the prohibited transaction provisions.  These exemptions enable a hedge fund to accept investments from benefit plan investors above the 25 percent threshold and to engage in many transactions that otherwise would be prohibited by ERISA.  That is, many hedge fund managers heretofore have taken the view that a fund can have significant ERISA money or a manager can have unfettered investment discretion, but not both.  But the prohibited transaction exemptions, properly understood and implemented, come close to reconciling that dichotomy.  To assist hedge fund managers in obtaining ERISA assets while retaining investment discretion, this article provides a comprehensive roadmap to the prohibited transaction exemptions most relevant to hedge fund managers.  Specifically, this article discusses: ERISA’s definition of “party in interest”; prohibited transactions under ERISA by category; typical hedge fund transactions that would (absent statutory and regulatory relief) be prohibited by ERISA; the conditions required to be satisfied for a hedge fund manager to qualify as a qualified professional asset manager (QPAM); the impact of the financial regulation overhaul bills on hedge fund managers’ eligibility for the QPAM exemption; the conditions required to be satisfied for a transaction to be eligible for the QPAM exemption; the impact of ERISA’s anti-self-dealing provisions on the timing of disposition of investments in private equity funds and hybrid funds; the service provider exemption; the eleven conditions that must be satisfied for performance compensation to comply with ERISA; the cross trading exemption; the foreign exchange transaction exemption; the electronic communication networks exemption; the block trading exemption; individual exemptions, including a discussion of a recent individual exemption granted to Ivy Asset Management Corporation in connection with a proposed sale of shares of offshore hedge funds owned by a hedge fund of funds; and a provocative provision included in the Restoring American Financial Stability Act of 2010, passed by the U.S. Senate on May 20, 2010, that threatens to undermine the ability of certain hedge funds to enter into swaps with prime brokers.

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  • From Vol. 3 No.11 (Mar. 18, 2010)

    Employee Misappropriation of Trade Secrets Litigation Stresses Dangers of Willful Spoliation of Evidence; Texas Federal Court Orders Trial, Adverse Inference Instruction and Monetary Sanctions for Willful Destruction of Electronically Stored Information

    The subject of spoliation of electronically stored information raises grave concerns for litigation generally, and in the hedge fund community in particular.  As we discussed in our February 11, 2010 issue, in Pension Committee of the University of Montreal Pension Plan v. Banc of Am. Sec., LLC, No. 05 Civ. 9016, 2010 WL 184312 (S.D.N.Y. Jan.15, 2010), Judge Shira Scheindlin of the U.S. District Court for the Southern District of New York addressed the duties of hedge fund managers and investors to preserve electronically stored information in anticipation of litigation involving failed hedge funds, and the sanctions for negligent spoliation of such evidence.  See “Pension Committee Case Highlights Obligations of Hedge Fund Managers to Preserve Documents and Information in Anticipation of Litigation,” The Hedge Fund Law Report, Vol. 3, No. 6 (Feb. 11, 2010).  The instant case, an employment dispute in the U.S. District Court for the Southern District of Texas, presents the next step in understanding this issue: what happens when the conduct complained of involves intentional spoliation?  On February 19, 2010, Judge Lee H. Rosenthal of the U.S. District Court answered that question.  He severely sanctioned defendants Nickie G. Cammarata and Gary Bell for their intentional spoliation of e-mails relevant to litigation with their former employer, plaintiff Rimkus Consulting Group, Inc.  The lawsuit arose over defendants purported use of trade secrets and proprietary information in forming a competing firm, U.S. Forensic, L.L.C., after resigning from Rimkus, and their alleged violation of non-compete and non-solicitation clauses in their employment contracts.  Rimkus moved for sanctions after discovering that defendants had destroyed e-mails relevant to the dispute.  Relying heavily on Pension Committee, Judge Rosenthal conducted an extensive analysis of spoliation law.  He found that defendants had a legal duty to preserve the e-mails in question; that they had committed a culpable breach of that duty; that the e-mails appeared to be relevant to the dispute; and that Rimkus suffered prejudice as a result of their destruction.  As a result, he imposed harsh sanctions: permitting the jury to hear detailed evidence of the defendants’ misconduct; providing the jury with an adverse inference instruction against them; and awarding Rimkus attorneys fees and costs resulting from the spoliation.  Notably, the court also cited the defendants’ spoliation and withholding of evidence as the basis to partially dismiss their motion for summary judgment.  We provide extensive detail the background of the action and the court’s legal analysis.

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  • From Vol. 2 No.44 (Nov. 5, 2009)

    As Criminal Trial Looms, Small Victory for Bear Stearns Hedge Fund Manager Matthew Tannin

    The notable indictment, arrest and prosecution of Matthew Tannin and Ralph Cioffi, two hedge fund managers for the now-defunct Bear Stearns Asset Management (BSAM) has, at least for Tannin, taken a momentarily beneficial turn.  Accused of conspiracy, securities fraud and wire fraud, and with trial looming, Tannin moved to suppress a purportedly damaging e-mail the Federal Bureau of Investigation (FBI) had recovered from his personal e-mail account with a search warrant.  The Honorable Frederic Block, who presides over the case in the United States District Court for the Eastern District of New York, agreed with Tannin that the search warrant was deficient, the resulting search unconstitutional and that the United States Attorney’s Office could not cure the error.  As a result, on October 26, 2009, the court ordered the e-mail suppressed on the eve of trial.  We describe the background of the action and the court’s legal analysis with respect to Tannin’s motion to suppress.

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  • From Vol. 2 No.10 (Mar. 11, 2009)

    SEC Seeks Custodial Safeguard and Stock Price Manipulation Data from Registered and Unregistered Investment Advisers

    On February 10, 2009, the SEC sent a so-called “sweep letter” to registered investment advisers requesting information about the advisers’ compliance and supervisory practices regarding the allegedly malicious creation, spread and use of false or misleading rumors with the intent to manipulate securities prices.  On February 13, 2009, the SEC sent an additional sweep letter to an undisclosed list of investment advisers and broker-dealers seeking information through interviews about client asset custodial practices.  These letters appear to be part of the SEC’s stated objective to pursue enforcement issues more seriously.  We discuss both letters in detail.

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  • From Vol. 1 No.15 (Jul. 8, 2008)

    Managers of Failed Bear Stearns Hedge Fund Charged with Criminal Securities Fraud

    On June 18, 2008, the US Attorney for the Eastern District of New York filed an indictment against Ralph Cioffi, 52, and Matthew Tannin, 46, former managers of two failed Bear Stearns hedge funds. Whether or not the government ultimately proves its case, the indictment contains important lessons for hedge fund managers, lawyers, compliance personnel and investors in at least two areas: (1) how to negotiate discussions with investors, lenders and other constituencies during periods of declining performance, and (2) how to use – and not use – e-mail.

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