A hedge fund that takes a minority equity position in a U.S. public company may encounter a variety of complex issues under the federal securities laws and other investment-related statutes.  In a guest article, Scott Budlong, a partner in the New York office of Richards Kibbe & Orbe LLP, and other RKO attorneys and an advisor to the firm, offer a comprehensive discussion of the most important of these U.S. legal issues from the perspective of an equity investment’s lifecycle: establishing, maintaining and exiting the position. Read full article …

If there’s a silver lining to the alleged Madoff Ponzi scheme, it may be the ability of defrauded investors to take “theft loss” deductions for their losses.  Generally, a theft loss deduction is limited to the tax basis of the investment minus previous deductions, depreciation or amortization, plus any commissions or transaction costs.  In other words, as a general matter, the IRS will not permit theft loss deductions with respect to purported “gains” or “income” from a Ponzi scheme or other investment fraud – amounts referred to, in this context, as “phantom income.”  We explain the mechanics of the relevant Internal Revenue Code Provisions and Treasury Regulations, detail relevant precedent and offer a “to do” list for Madoff investors considering claiming a tax loss deduction with respect to their Madoff-related losses. Read full article …

Hedge fund managers are frequently described as a “secretive” bunch.  To the extent that characterization is valid, its roots may reside in the recognition that for hedge fund managers, publicity carries with it substantial potential downside, and little possibility for upside.  One of the more notable potential downsides is that any advertising or marketing by hedge fund managers may be construed as a “general solicitation” of investors.  Since many hedge funds offer their interests to accredited investors in reliance on Regulation D under the Securities Act of 1933, and Reg D prohibits general solicitations, hedge fund managers are effectively prohibited from advertising.  However, hedge fund managers are starting to use digital rights management and enterprise rights management technology to significantly expand the scope of their marketing efforts while remaining within the Reg D safe harbor.  We explain in detail how they are doing this. Read full article …

Many hedge funds avoid regulation under the Employee Retirement Income Security Act of 1974, as amended, by maintaining participation by “benefit plan investors” below 25% of the value of each class of equity interest issued by the fund.  For such funds, it is important not to lose sight of the requirements for satisfying the 25% test, in light of an unprecedented number of redemption requests due to general turmoil in the financial markets.  In a guest article, Willkie Farr & Gallagher LLP provides timely and important reminders on how to remain in compliance with the 25% test, even in the presence of substantial redemptions by benefit plan investors and non-benefit plan investors. Read full article …

On the heels of the worst year of hedge fund performance in recent memory, capped by lurid and still unfolding scandals, hedge fund managers are bracing for the near inevitability of new regulations for the industry. We discuss in detail two potential categories of new regulations – strengthened whistleblower programs for hedge funds and capital requirements for hedge funds similar to those applicable to mutual funds. Specifically, we address the mechanics of such potential regulations, the precedents and some of the practical obstacles to implementing such regulations. Also, we explore other potential new regulations, and the contemplated restructuring (and consolidation) of financial market regulators. Read full article …

On December 30, 2008, Group Defined Pension Plan & Trust, a Jersey City, New Jersey-based pension plan, sued Tremont Partners Inc. and a hedge fund of funds it manages, as well as affiliated entities, the fund’s auditor and others, alleging violations of federal securities laws and New York state law.  We provide details of the factual and legal allegations in the complaint, and end with a coda, inspired by a recent Seventh Circuit decision, on a circuit split regarding the right to remove securities class action cases from state to federal court. Read full article …