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    Apr. 7, 2008

Treasury’s Blueprint Unlikely to Affect Hedge Funds

  • Paulson’s blueprint merely a starting point for discussion; no action expected in election year.
  • Initial reaction: blueprint’s impact on hedge funds likely to be minimal - nevertheless, hedge fund managers urged to study blueprint.
  • Blueprint’s proposed merger of SEC and CFTC, adopting CFTC’s regulatory philosophy, could benefit hedge funds.
  • Proposed Conduct of Business Regulatory Agency could have responsibility for chartering hedge funds.

Federal District Court Says Hedge Fund Investors May Not Prove Securities Fraud by “Hindsight”

  • Managers had no duty to alert hedge fund investor plaintiffs (in fund focused on insured sub-prime auto finance loans) that credit union market was troubled, resulting in a loss of value of their investments, since no forward-looking factual representations had been made.
  • However, Leveraged Fund Confidential Offering Memo made material misrepresentations because risk alert issued two months before issuance of Memo emphasized higher credit risk for sub-prime lending and required immediate corrective action.

Operations Management Group Sends Letter to New York Fed Regarding Industry Efforts to Increase Transparency in OTC Derivatives Market

  • OMG Letter outlined goals for derivatives dealers and trade associations for 2008, including:
  • Expanded use of electronic confirmation platforms.
  • Development of trade associations’ goal implementation plans.
  • Major dealers and buy-side institutions to meet submission, matching and accuracy targets.
  • Having most major dealers live for central settlement.
  • Submission of novation requests via electronic platforms rather than email.

Hedge Fund Service Professionals Do Not Owe Fiduciary Duty to Investors But May be Subject to Liability for Aider and Abettor Claims if Provided by State Statute

  • State appeals court dismissed hedge fund investors’ $200 million lawsuit against fund’s outside counsel for lack of any fiduciary duty owed to investors.
  • State appeals court ruled that preparation of offering memo not a representation, fraudulent or otherwise, to investors.
  • Oregon investor who invested and lost $2.75 million in the fund and filed a separate federal fraud case survived outside counsel’s motion to dismiss because Oregon law grants private right of action against aiders and abettors.
  • Federal case particularly significant because aider and abettor claims against lawyers or accountants in securities fraud cases generally barred under federal law, under recent Stoneridge Supreme Court case.

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