Mar. 9, 2017

How Hedge Fund Managers Can Protect Their Trade Secrets in Light of Recent NY Appellate Ruling

A New York state appellate court recently issued a significant ruling in People v. Aleynikov that clarifies and settles the state’s ability to pursue criminal charges for theft of trade secrets in cases involving computer code. The ruling provides hedge fund managers an additional weapon in their arsenal to protect their valuable technology and trade secrets. In a guest article, Sean O’Brien, managing partner of O’Brien LLP, along with counsel Sara A. Welch and associate James Ng, discuss the theory of criminal liability used by the state of New York to convict Sergey Aleynikov for stealing trade secrets from his former employer, Goldman, Sachs & Co. For additional insights from O’Brien, see “Recent NY Appeals Court Rulings Clarify How Fund Managers May Pursue Former Employees for Breach of Fiduciary Duty and Improper Use of Performance Record” (Dec. 15, 2016); “DTSA Provides Hedge Fund Managers With Protection for Proprietary Trading Technology and Other Trade Secrets” (Jun. 23, 2016); and “How Can Hedge Fund Managers Protect Themselves Against Trade Secrets Claims?” (May 16, 2014). For coverage of other employment disputes involving alleged theft of trade secrets by employees of hedge fund managers, see “Quant Fund Manager Moves Aggressively Against Former Employee Who Allegedly Stole Trade Secrets and Other Proprietary Information” (Mar. 21, 2014); and “Opus Trading Fund Accuses Former Trader That Joined Competitor of Breach of Contract and Misappropriation of Proprietary Information” (Apr. 21, 2011).

Six Common Misconceptions U.S. Fund Managers Have About Marketing in Europe

Obtaining European investors has been perceived as prohibitively difficult and costly for U.S. fund managers; consequently, many avoided marketing in the region in favor of pursuing the ample funds available from U.S. investors. As fund managers have recently confronted an increasingly difficult fundraising environment in the U.S., however, many have more seriously considered approaching European investors. See “How Emerging Hedge Fund Managers Can Raise Capital in a Challenging Market Without Overstepping Legal Bounds” (Aug. 4, 2016). Unfortunately, after avoiding the region for so long, many U.S. fund managers have a limited understanding of the array of requirements for them to validly market in Europe. To help our readers navigate these choppy waters, the Hedge Fund Law Report has identified the six most pervasive misconceptions expressed by U.S. fund managers about marketing to European investors. This article outlines, and suggests ways to correct, those common misconceptions, including with respect to European domiciliation requirements; the slippery standards for when managers have marketed to, or reverse solicited, investors; and the availability of the E.U.’s Alternative Investment Fund Managers Directive (AIFMD) third-country passport and each country’s national private placement regime. For more on marketing in Europe, see “Four Approaches to Fund Marketing and Distribution Under the AIFMD” (Jun. 2, 2014); and our two-part series “Application of AIFMD to Non-E.U. Alternative Investment Fund Managers”: Part One (May 23, 2013); and Part Two (Jun. 13, 2013).

Jersey Offers Range of Marketing and Distribution Options, Operational Support for Investment Funds

While the global funds industry eagerly anticipates the form Brexit will take and which countries will enjoy third-country passporting rights under the Alternative Investment Fund Managers Directive (AIFMD), offshore jurisdictions increasingly seek to lure funds by positioning themselves as reputable financial centers with robust legal and financial services infrastructures. Amid these developments and trends, the island of Jersey holds considerable appeal due to its receipt of a favorable assessment on the equivalence of its legal regime with that of the E.U.; network of management firms to assist fund managers with reporting and compliance; and tax-neutral environment beneficial to certain fund structures established in the jurisdiction. Yet myriad questions face funds that seek to do business there. What is the status of the third-country AIFMD passport? How does Jersey’s reputation compare to other offshore jurisdictions such as the Cayman Islands or Guernsey? How should fund managers go about doing business in Jersey? What administrative, operational and strategic approaches are ideal for a given type of fund? To cast light on these questions and help fund managers make informed decisions about setting up and operating in Jersey, the Hedge Fund Law Report has conducted an in-depth interview with Emily Haithwaite, who recently joined Ogier as a partner. For more on Jersey, see “ESMA Recommends Extension of the AIFMD Passport for Hedge Fund Managers and Funds in Certain Non-E.U. Jurisdictions” (Aug. 6, 2015).

Seeders Describe Their Criteria for, and Common Pitfalls They Observe in, Prospective Managers

EisnerAmper and Kleinberg, Kaplan, Wolf & Cohen recently co-hosted a program featuring insights on the structure and terms of seed deals, as well as on the things seeders look for when considering investments. The panel was moderated by Joshua Leonardi, vice president at Goldman Sachs, and featured Philip Harris, managing director and head of equity strategies at asset manager Crestline Investments; Eric Hoerdemann, chief of research at seed and early stage investor Stride Capital Group; and Elena Ranguelova, portfolio strategist at Investcorp. This article highlights the key points raised by the panel that provide valuable insight to any fund manager looking to raise capital from a seeder or other large investor. For coverage of another panel from the program, see “Benefits, Tax Considerations, Common Structures and Terms of Seed Deals” (Jan. 26, 2017). For an overview of seeding and seed structures, see “Seward & Kissel Private Funds Forum Analyzes Trends in Hedge Fund Seeding Arrangements and Fee Structures (Part One of Two)” (Jul. 23, 2015). For additional insight from Investcorp, see “FINforums’ Annual Hedge Fund Summit Focuses on Operations, Marketing and Hedge Fund Strategies in Non-Hedge Fund Structures” (Oct. 6, 2011).

How Hedge Funds Can Protect Their IP: Pepper Hamilton Attorneys Discuss Trade Secrets and Patents (Part Two of Two)

Hedge fund managers are often portrayed by the media as a secretive group. In recent years, this stereotype has been reinforced when managers have pursued civil litigation against – or assisted the DOJ in the criminal prosecution of – former employees that have allegedly stolen the managers’ “secret sauce.” See “Citadel Commences Action Against a Former Employee for Misappropriation of Confidential Information With the Intent to Aid a Competitor” (Sep. 8, 2011); and “Protecting Hedge Funds’ Trade Secrets: The Federal Government’s Enforcement of Criminal Laws Protecting Proprietary Trading Strategies” (Dec. 10, 2010). A panel of intellectual property (IP) attorneys at Pepper Hamilton’s recent symposium reviewed the protections available to investment managers to protect their IP. Moderated by Pepper Hamilton partner Gregory J. Nowak, the panel featured Evan H. Katz, a managing director of alternative asset investment firm Crawford Ventures, Inc.; Pepper Hamilton partners Michael K. Jones and Peter T. Wakiyama; and their associates Lori E. Harrison and Joseph J. Holovachuk. This article, the second in a two-part series, explores the panelists’ insights with respect to trade secrets and patents in the investment management context. The first article discussed how investment managers can safeguard their brands through trademarks and protect their copyrightable materials. For more on trade secrets, see “Procedures for Hedge Fund Managers to Safeguard Trade Secrets From Rogue Employees” (Jul. 21, 2016); and “Eight Measures That Hedge Fund Managers Can Take to Mitigate the Risk of Theft of Their Trade Secrets” (May 24, 2012). 

Study Reveals Weaknesses in Asset Managers’ Third-Party and Vendor Risk Management Programs

MyComplianceOffice (MCO) and the Center for Financial Professionals recently released a study of third-party risk management practices in the banking, asset management and insurance industries that found a significant “lack of maturity in third party risk management” at many firms. The survey explores the maturity of risk management practices at the respondents’ firms and considers decision-making authority, budgeting, development of best practices and the drivers and objectives of risk management efforts. This article summarizes the key findings from the survey. For other recent insights from MCO, see “What the Record Number of 2016 SEC and FINRA Enforcement Actions Indicates About the Regulators’ Possible Enforcement Focus for 2017” (Dec. 15, 2016); and “Practical Guidance From Former SEC Examiners on Preparing for and Surviving SEC Examinations” (Sep. 1, 2016). For coverage of another risk management study, see “BNY Mellon Study Identifies Best Risk Management Practices for Hedge Fund Managers” (Sep. 27, 2012).

Jeff Mackey Joins Dechert in Dublin

Global law firm Dechert has added financial services partner Jeff Mackey to its Dublin office. Mackey advises clients on the launch and registration of many types of investment funds, including Undertakings for Collective Investments in Transferable Securities (UCITS) structures, exchange-traded funds (ETFs), real estate funds and alternative investment funds. He played a direct role in the launch of the first-ever Irish-authorized, actively managed UCITS ETF. For additional insight from Dechert partners, see “The Current State of Direct Lending by Hedge Funds: Fund Structures, Tax and Financing Options” (Oct. 27, 2016); and “Capital-Raising Opportunities, Regulatory Hurdles and Cultural Challenges Faced by Hedge Fund Managers in China and the Middle East” (Jun. 23, 2016).

O’Melveny & Myers Bolsters Investment Funds Practice

Jonathan Blake has joined O’Melveny & Myers’ investment funds practice in London. Blake advises investors and funds on a range of matters, including domestic and cross-border private equity, venture capital and debt and mezzanine transactions. In the late 1980s, Blake played a prominent role in interactions with the U.K. Inland Revenue and Department of Trade and Industry, helping to engineer regulatory changes that facilitated the use of limited partnerships in fund structures. For commentary from other O’Melveny partners, see “The Rationale, Mechanics and Common Terms for Secondary Market Sales of Private Equity Fund Interests” (Apr. 11, 2013).