Feb. 22, 2018

Best Practices for Fund Managers to Ensure a Fair Process When Disciplining Employees (Part Three of Three)

Once an adviser has fully investigated employee wrongdoing, it must decide whether and how to impose discipline. To promote a sense of fairness – and meet employment law requirements in certain jurisdictions – the procedures governing those decisions must include some form of due process for the employees involved. Although the context does not require the level of protections in the Fourth and Fourteenth Amendments of the U.S. Constitution, there does need to be regularity and established procedures for how the adviser will make these important determinations. While those procedures will differ between advisers and jurisdictions, common elements will include notice to the employee; a set time frame for decision-making; a decision-maker with appropriate insight and authority; a range of possible punishments; and the use of objective criteria to impose punishment. This final article in our three-part series on employee discipline identifies the elements of a disciplinary process and how managers can promote fairness and due process. The first article discussed the value of setting expectations for discipline in advance and how advisers can apply discipline consistently in the face of inconsistent local employment laws. The second article addressed techniques for gathering evidence that can effectively be used to support a disciplinary action, including the thorny issue of protecting privilege while building a record. For more on important employment considerations for investment managers, see “Lessons on Separation Agreements That Fund Managers Can Glean From Recent SEC Action” (Feb. 2, 2017); and “Trending Issues in Employment Law for Private Fund Managers: Non-Compete Agreements, Intellectual Property, Whistleblowers and Cybersecurity” (Nov. 17, 2016).

How Fund Managers Can Maintain Work Product Protection During Investigations After the Herrera Decision

The government – including the DOJ, SEC and CFTC – promotes the potential incentives available to companies that voluntarily self-disclose misconduct in a timely manner and fully cooperate with law enforcement and regulators. See “Newly Revealed CFTC Self-Reporting and Cooperation Regime Could Offer Benefits to Fund Managers, or Lead to Increased Enforcement” (Oct. 19, 2017). Timely disclosure of facts ascertained by either in-house or outside counsel during the course of a manager’s internal investigation, although critical in achieving full cooperation credit from a regulator, poses certain risks that counsel must consider before making that disclosure. Highlighting the potential pitfalls that can arise when a company seeks to fully cooperate with a regulator, a recent decision in the Southern District of Florida calls into question whether disclosing information about an internal investigation to the government will result in a waiver of the work product protection. In a guest article, Baker Botts partners Bridget Moore and Seth Taube, and associate Joseph Perry, analyze the decision and discuss strategies that a fund manager can employ to avoid waiving the attorney work product protection. See Hedge Fund Law Report’s three-part series on protecting attorney-client privilege and work product while cooperating with the government: “Establishing Privilege and Work Product in an Investigation” (Mar. 23, 2017); “Minimizing Cooperation Risks” (Mar. 30, 2017); and “Implications for Collateral Litigation” (Apr. 6, 2017).

Ways the Valeant-Pershing Square Settlement Could Affect Future Insider Trading Lawsuits

Valeant Pharmaceuticals and Pershing Square recently announced their decision to make a joint $290 million payment to settle litigation arising from alleged insider trading committed in 2014. See “Did Pershing Square and Valeant Violate Insider Trading, Antitrust or Tender Offer Rules in Their Pursuit of Allergan?” (May 2, 2014). Shareholders of Allergan claimed that Pershing Square illegally enriched itself by buying Allergan shares, and earning more than $2 billion in profits, with the knowledge that Valeant planned to initiate a bid for Allergan. Although Valeant ultimately failed in its takeover bid for Allergan, allegations of insider trading and other violations of securities laws have dogged both Valeant and Pershing Square for years. Some observers may be surprised that the insider trading claims against Pershing Square and Valeant were not dismissed. Arguably, the respondents did not technically commit insider trading because they acted without scienter – a key component of insider trading violations as traditionally understood. This article analyzes the Valeant-Pershing Square settlement, together with insights from practitioners with expertise in insider trading law, to help readers understand the settlement’s implications on insider trading law and takeaways for activist investors. For additional analysis of the evolution of insider trading law, see “HFLR Panel Identifies Best Practices for Avoiding Insider Trading Liability in the Aftermath of Martoma” (Jan. 18, 2018).

Securities Docket Webinar Analyzes 2017 SEC Enforcement Activities, Along With Disgorgement and Whistleblower Developments (Part One of Two)

Despite the change in administration, SEC enforcement efforts remained active in fiscal year 2017. In addition, new Chair Jay Clayton has emphasized the protection of retail investors. This philosophy has trickled down to the Division of Enforcement and its priorities, including with respect to accounting cases, which represent the largest area of enforcement. Recent court rulings may also have significant ramifications on the extent to which the SEC can collect disgorgement and the protection of whistleblowers. These issues, among others, were discussed in a recent Securities Docket webinar featuring William R. McLucas, partner at WilmerHale; Doug Davison, partner at Linklaters; and Martin Wilczynski and Steven E. Richards, senior managing directors at Ankura Consulting Group. This article, the first in a two-part series, explores key takeaways from the program with respect to 2017 enforcement actions and other developments in the areas of accounting and audit cases, disgorgement and whistleblowers. The second article will analyze developments in the areas of cybersecurity and cryptocurrencies; individual accountability; insider trading; extraterritorial application of securities laws; the administrative law judge regime; and attorney-client privilege. For additional recent insight from WilmerHale attorneys, see “2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration” (Feb. 16, 2017).

How the Tax Cuts and Jobs Act Will Affect Private Fund Managers and Investors

The recently enacted Tax Cuts and Jobs Act (Tax Act) makes some of the most significant changes to the Internal Revenue Code since 1986. A recent program presented by Baker Tilly Virchow Krause addressed how the Tax Act will affect private fund managers and investors, focusing on deductions related to income from pass-through entities; taxation of carried interest; corporate and international taxation; the business-interest deduction; and other changes relevant to private funds and their managers. The program featured Jean-Paul Schwarz, a Baker Tilly tax principal; and Gregory Kastner and Benjamin Lipman, senior tax manager and senior manager, respectively, at Baker Tilly. This article summarizes their insights. For further commentary on the Tax Act, see “New Tax Law Carries Implications for Private Funds” (Feb. 1, 2018). For additional insight from Baker Tilly, see “How Tax Reforms Proposed by the Trump Administration and House Republicans May Affect Private Fund Managers” (Feb. 9, 2017).

FCA Head of Technology Outlines Regulator’s Cybersecurity Expectations and Three Key Lessons for Fund Managers

As cybersecurity remains a priority for regulators around the globe, fund managers must take into account regulatory expectations and guidance when positioning themselves against and responding to potential cyber attacks. See our two-part series on how hedge fund managers can meet the cybersecurity challenge: “A Snapshot of the Regulatory Landscape” (Dec. 3, 2015); and “A Plan for Building a Cyber-Compliance Program” (Dec. 10, 2015). In a recent speech, Robin Jones, Head of Technology, Resilience & Cyber at the U.K. Financial Conduct Authority (FCA) outlined ways for fund managers and other firms to build effective cyber capability and accountability, protect critical information, detect cyber attacks and respond quickly and effectively to any attempted breaches. This article highlights the main provisions in his speech, including three key lessons fund managers can learn from the high-profile cyber attacks that have taken place within the past year. For more on the FCA’s views on cybersecurity, see “FCA Director Lays Out Expectations for Cybersecurity of Financial Services Firms: Identification of Cyber Risks, Detection, Firm Preparedness and Information Sharing” (Sep. 29, 2016); and our two-part series “Navigating FCA and SEC Cybersecurity Expectations”: Part One (Jan. 7, 2016); and Part Two (Jan. 14, 2016).

Andrew Cardonick Joins Sidley Austin in Chicago

Andrew Cardonick has joined Sidley Austin as a partner in the firm’s global finance practice in Chicago. Cardonick advises banks, business development companies and private equity funds on lending transactions, restructurings and regulatory compliance matters. For coverage of another recent hire at the firm, see “Daniel Serota Joins Sidley Austin in New York” (Aug. 10, 2017).