In two recent winding-up petitions issued against investment funds on the just and equitable basis, the Financial Services Division of the Grand Court of the Cayman Islands has revisited the controversial question of the appropriate test for winding up a company on the grounds of loss of substratum (i.e., loss of the purpose for purpose for its existence). Considered in the context of earlier Cayman authorities on the test for loss of substratum, the law is now in a considerable state of confusion and is therefore ripe for clarification by the Cayman Islands Court of Appeal – particularly because of its significance for Cayman’s financial services industry. In this guest article, the first in a two-part series, Tony Heaver-Wren and Sebastian Said, partner and counsel, respectively, at Appleby (Cayman), describe the history of the Cayman Islands loss of substratum and the competing current approaches – the “impossibility test” and the “non-viability test” – being used by the courts. The second article will analyze how the impossibility test can be properly applied in the context of a fund proposing a soft wind-down, and how the potentially valid policy factors identified by courts concerning its usage can appropriately be addressed. For additional insight from Appleby (Cayman) attorneys, see “Changes to Redeeming Investor Distribution Priority and Other Ramifications of the Primeo Appellate Decision for Cayman Islands Hedge Funds” (Sep. 15, 2016); “How Can Service Providers to Cayman Islands Hedge Funds Enforce Rights to Contracts to Which They Are Not Parties?” (Jun. 19, 2014); and the two-part series entitled “How Can Investors in Cayman Hedge Funds Maximize Protection of Their Investments When the Fund Is Near or at the End of Its Life?”: Part One (Dec. 5, 2013); and Part Two (Dec. 12, 2013). Read full article …

E.U. Regulation 236-2012 (Regulation), in effect since November 1, 2012, imposed reporting obligations on short sellers of E.U. securities and regulated certain aspects of the credit default swap market. Compliance, however, is difficult due to a lack of available guidance on those reporting requirements. To help clarify these obligations for fund managers, a recent program presented by Advise Technologies (Advise) offered a comprehensive overview of the Regulation, emphasizing the reporting requirements for short-sellers and the calculation of reporting thresholds. Moderated by William V. de Cordova, Editor-in-Chief of the HFLR, the program featured Anna Lawry, counsel at Ropes & Gray, and Marye Cherry, E.U. regulatory counsel at Advise. This article summarizes the panelists’ key insights. For more on the Regulation from Lawry and Cherry, see “How Fund Managers Can Navigate and Avoid the Pitfalls of European Short Sale Reporting Obligations” (Dec. 1, 2016). For a review of U.S. short-selling rules, see “Impact of Regulation SHO on the Short Sale Activity of Hedge Fund Managers and Broker-Dealers” (Nov. 10, 2011). For additional insight from Advise, see our two-part series on how non-E.U. hedge fund managers can comply with E.U. private placement regimes: “Registration” (Dec. 3, 2015); and “Reporting” (Dec. 10, 2015).  Read full article …

Craig Cordle recently joined Ogier’s investment funds team as a group partner based in Guernsey. Cordle counsels his clients on all aspects of structuring, restructuring and merging investment funds and other collective investment arrangements, as well as assisting with cross-border marketing and operations for these entities. In connection with his move to Ogier, the Hedge Fund Law Report recently interviewed Cordle concerning his views on the current state of the funds market in Guernsey, the complexities and nuances in launching exchange-listed funds and how law firms are meeting the current needs and demands of their fund clientele. Cordle provides valuable insight to any fund manager considering these funds or Guernsey as a jurisdiction, in addition to all fund managers concerned with managing outside counsel amid expense constraints. For additional insight from Ogier attorneys, see “Will Reported Purchases by D.E. Shaw Hedge Funds of Assets in Other Hedge Funds’ Side Pockets Set a Precedent, or Highlight the Fiduciary Duty, Valuation and Other Challenges in Such Transactions?” (Mar. 18, 2010); and “Offshore Fund Vehicles: Do U.S. Investment Managers Need Them?” (Feb. 4, 2010). Read full article …

The hedge fund industry stands at an uncertain juncture, with a new president set to take office in Washington in January 2017, and the announcement that SEC Chair Mary Jo White will be stepping down in the same month. While some observers expect the incoming administration to be generally pro-business and averse to overregulation, it may not be easy to alter or transform an environment in which aggressive financial regulatory policies have become the norm – including a rigorous crackdown on “pay to play” practices, insider trading and conflicts of interest; a growing use of, and reliance on, innovative data analytics to prosecute traders and investment managers; aggressive whistleblower incentives; and a push to bring enforcement cases on the SEC’s “home turf” through administrative law proceedings. The above practices were the subject of a recent panel discussion hosted by BakerHostetler and featuring Marc Powers and Mark Kornfeld, partners in BakerHostetler’s securities litigation practice; Walter Van Dorn, partner and national leader of the firm’s international securities and capital markets practices; and Michelle Chopper, director of the advisory and consulting practices at Arthur Bell. The key takeaways from the panel are presented in this two-part series. This first article reviews the nuances and potential pitfalls of the pay to play rule, the current priorities of the SEC’s enforcement program and the role of technology in detecting violations. The second article will discuss the SEC’s use of administrative proceedings to try enforcement cases, the impact of the Dodd-Frank Act’s whistleblower program and guidance for managers on approaching a regulatory exam or investigation. For recent insight from Powers and Kornfeld, see “‘Gatekeeper’ Actions by the SEC and Investors Against Administrators Challenge Private Fund Industry” (Sep. 8, 2016); and “A New Look at an Old Standard: The Power of Minority Bondholders Under the Trust Indenture Act” (Mar. 5, 2015).  Read full article …

On December 12, 2016, Highland Capital Management, L.P. (Highland) commenced a defamation action in New York State Supreme Court against one of its investors – Muirfield Capital Management LLC (Muirfield) – and Muirfield’s principal Geoffrey Stern. Highland claims that the defendants falsely told The Wall Street Journal that Highland and its president and co-founder, James Dondero, had stolen investor money. This article explores the facts leading up to the suit and the specific allegations in Highland’s complaint. Highland is not a stranger to defamation suits. See “Highland Capital Management Sues Former Private Equity Chief for Breach of Employment and Buy-Sell Agreements” (May 17, 2012). For more on communicating with the media, see our two-part series entitled “Benefits and Burdens to Hedge Fund Managers of Speaking to the Media”: Part One (Nov. 29, 2012); and Part Two (Dec. 6, 2012). Read full article …

Leila Rafi has joined McMillan as a partner in its capital markets and funds practices in Toronto. Rafi advises investment managers, dealers and companies on the launch of investment products; public financings; reorganizations; mergers and acquisitions; and reporting and compliance matters. Another area of Rafi’s practice involves advising clients on director and officer liability issues. For practical insights on doing business in Canada’s funds market, see “Practitioners Discuss U.S. and Canadian Shareholder Activism and Activist Tools” (Dec. 4, 2014); and “AIMA Canada Handbook Provides Roadmap for Hedge Fund Managers Doing Business in Canada” (Sep. 13, 2012).

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