Jan. 28, 2009

Can the Madoff Trustee Recover Fictitious Investment Gains Distributed to Investors Prior to Inception of the SIPA Proceeding?

Possession, they say, is nine-tenths of the law.  But sections of the Bankruptcy Code (incorporated, in pertinent part, by reference into the Securities Investor Protection Act of 1970 (SIPA)) providing for avoidance of preferential transfers and fraudulent conveyances demonstrate that possession is not invariably determinative of ownership.  This point has renewed relevance in light of the alleged $50 billion Ponzi scheme orchestrated by Bernard Madoff.  The question for many investors who thought they got out unscathed is now: will the SIPA trustee be able to require them to return money already paid out?  Investors who lost all or substantially all of their investments with Madoff are asking the same question, since it looks increasingly likely that any recovery for Madoff investors will come from claw back of formerly distributed amounts as opposed to discovery of hidden cash.  We explore these questions in detail, outlining the statutory bases of recovery actions, defenses to such actions, relevant precedents, statute of limitations concerns and hedge fund marketing issues.

Insurance Coverage For Subprime Claims Against Hedge Funds: Will Your Insurer Pay?

More than 600 lawsuits are pending against various entities caught in the fallout of the subprime mortgage meltdown and global credit crisis, with additional litigation a near certainty.  A prime target is hedge funds and their advisers and general partners.  In addition to the losses already suffered as the value of their securities plummeted, hedge funds now face the costs of the resulting litigation.  With the litigation swirling, it is time for hedge fund managers to review their Errors & Omissions and Directors & Officers liability policies.  In a guest article, Matthew J. Schlesinger and Jan A. Larson, partner and associate, respectively, in Reed Smith LLP’s Insurance Recovery Group, examine the purpose and operation of E&O and D&O insurance, common coverage exclusions of which hedge fund managers should be aware and practical tips for hedge funds that currently face, or believe they are likely to face, claims or even litigation.

Accredited Investor Requirements Could Change, Limiting New Fund Formation and Capital Raising Opportunities for Hedge Funds

As the new administration and a new SEC seek to put their stamp on financial regulation, and in a climate of greater receptivity to increased regulation, the hedge fund industry is bracing for new rules covering a variety of their operations and investments.  One somewhat-long-simmering change that may finally find its way onto the books is an increase in the “accredited investor” standards under Regulation D.  These standards are critically important for hedge funds because many funds offer their interests (e.g., limited partnership interests) in reliance on Reg D, which provides a safe harbor from the public offering rules.  We detail the current accredited investor rules, past proposals to revise those rules and potential alternative accreditation structures.  We also examine what potential accreditation rule changes could mean for investors and hedge fund managers.

Holtz Rubenstein Reminick LLP Hosts “Town Hall Meeting” on Madoff Matters, Including: Filing of SIPC Claim Forms, Redress Via Tax Refunds, Insurance Claims and More

On January 21, 2009, accounting firm Holtz Rubenstein Reminick LLP (HRR) hosted at the Jumeirah Essex House a town hall-style meeting on “Implications and Consequences of the Alleged Fraud of Bernard Madoff.”  The panel included three HRR partners, a securities lawyer and the CEO of an investment adviser.  We report on the key ideas discussed at the meeting, including practical recovery and tax tips for investors affected by the alleged Madoff Ponzi scheme.

Report by Pershing LLC and Aite Group LLC Finds Counterparty Risk Remains a Paramount Concern Among Hedge Fund Managers

According to a white paper published by Pershing LLC, a subsidiary of Bank of New York Mellon Corporation, and Aite Group LLC, an independent research and advisory firm focused on business, technology and regulatory issues and their impact on the financial services industry, managing counterparty risk is a far more critical component of a hedge fund’s overall business operations today than it has been in previous years.  We discuss the findings of the white paper, and detail the paper’s recommendations regarding best practices for proactively managing counterparty risk.

SEC Charges Hedge Fund Manager Arthur Nadel with Defrauding Investors Out of $300 Million

On January 21, 2009, the Securities and Exchange Commission (SEC) accused Arthur Nadel of Sarasota, Florida, and the two investment management companies he controls, Scoop Capital, LLC and Scoop Management, Inc., with fraud in connection with six hedge funds  for which he acted as the principal investment adviser (the Funds).  We offer details of the SEC’s complaint, including the factual background and the legal allegations.