Dec. 23, 2009

SEC’s First-Ever Credit Default Swap Insider Trading Case Survives Motion to Dismiss

On May 5, 2009, the Securities and Exchange Commission (SEC) commenced an insider trading enforcement action against Jon-Paul Rorech, a Deutsche Bank bond and credit default swap salesman during the relevant period, and Renato Negrin, a portfolio manager employed during the relevant period by hedge fund adviser Millennium Partners, L.P.  This case is the first insider trading case the SEC has brought with respect to credit default swaps, which are not registered securities.  The SEC alleged that Rorech and Negrin engaged in insider trading of the credit default swaps of VNU N.V., a Dutch media conglomerate.  The defendants moved to dismiss the complaint primarily on the basis that credit default swaps were not “securities based swap agreements” for purposes of insider trading law.  Rorech also argued that the relevant information was not confidential and that the SEC lacked jurisdiction over foreign bonds.  The court rejected their contentions and allowed the SEC’s case to proceed.  We review the arguments made and the court’s rationale for its decision.  See also “SEC Brings First-Ever Credit Default Swaps Insider Trading Case,” Hedge Fund Law Report, Vol. 2, No. 19 (May 13, 2009).

Creditors’ Rights in the United Arab Emirates

The recent announcement by the government of Dubai that it would be seeking a stand-still on debt repayments by Dubai World and its subsidiary Nakheel PJSC has sent shock waves around the globe and raises questions regarding the rights of creditors in the United Arab Emirates (UAE).  In a guest article, Paul de Cordova, Dr. Sabine Konrad, Tony Griffiths and Jeffrey Rich, all partners at K&L Gates, highlight some key features of UAE federal insolvency law that may be relevant to hedge funds and others who have dealings with debtors in the UAE.  In particular, the K&L Gates partners address questions including: What are the insolvency laws in Dubai?  What constitutes bankruptcy under the insolvency laws?  Who is subject to the insolvency laws?  Who can commence bankruptcy proceedings?  Can a creditor sue the bankrupt business?  How are creditors ranked in insolvency?  Can a trader seek protection from its creditors?  Can transactions be set aside in bankruptcy proceedings?  And could the government be responsible for the debts of its controlled entities?

Cerberus Financing Unit Sues Its Former Law Firm and Two of Its Partners for $55 Million for Allegedly Giving Bad Advice

On December 11, 2009, the financing unit of private equity and hedge fund manager Cerberus Capital Management, L.P., Ableco Finance LLC (Ableco), filed an amended complaint in New York State Supreme Court against Paul, Hastings, Janofsky & Walker LLP (Paul Hastings), claiming the law firm gave it bad advice in connection with a $125 million loan Ableco made last year to Bay Harbour Management (Bay Harbour), a company looking to bring retailer Steve & Barry’s out of bankruptcy.  Ableco alleges that Paul Hastings failed to inform Ableco about an earlier agreement between Steve & Barry’s and Bay Harbour that prevented Ableco from taking over all of Steve & Barry’s inventory.  Ableco claims it would not have made the loan if Paul Hastings had advised it that the buyer, Bay Harbour, would not have rights to all of Steve & Barry’s inventory, which Ableco had understood would back the loan.  This article details the factual and legal allegations in the complaint.

New York Supreme Court Rules that Aris Multi-Strategy Funds’ Suit against Hedge Funds for Fraud May Proceed, but Negligence Claims are Preempted under Martin Act

Aris Multi-Strategy Fund, LP (Aris LP) and Aris Multi-Strategy Offshore Fund Ltd. (Aris Offshore) (together, Aris or Plaintiffs), two funds of hedge funds managed by Aris Capital Management, LLC, brought an action to recover over $5.13 million allegedly lost by the funds in connection with their investments in underlying hedge funds, the Horizon Funds.  Among other things, Plaintiffs alleged fraud on the part of the Horizon Funds and the indirect owner of the Horizon Funds’ investment manager.  On December 14, 2009, the New York State Supreme Court rejected a motion by the defendants to dismiss the fraud claims, finding that Plaintiff’s complaint (1) contained allegations sufficient to state a cause of action for fraud, and (2) raised factual questions sufficient to survive dismissal under New York Civil Practice Law and Rules Section 3211.  However, the court dismissed tort claims brought by Plaintiffs, finding that such claims were preempted by the Martin Act (New York State’s anti-securities fraud statute).  We detail the factual background of the case, Aris’ legal arguments and the court’s analysis.

FASB Issues Proposed Accounting Standards Update to Defer Consolidation Reporting Requirements for Managers of Certain Hedge Funds

On December 4, 2009, the Financial Accounting Standards Board (FASB) issued proposed guidance to allow certain entities that manage the assets of investment funds, including mutual, private equity and hedge funds, to avoid having to consolidate the assets and liabilities of such entities on their balance sheets under new consolidation rules that go into effect in January 2010.  The draft guidance, issued as an Accounting Standards Update (ASU) and entitled “Amendments to Statement 167 for Certain Investment Funds,” would affect the use of Accounting Standards Codification Topic 810 (formerly FASB No. 167, amending FASB Interpretation 46(R)).  As currently written, Accounting Statement 167 – which requires nonpublic companies to publicly disclose their interests in variable interest entities in a similar manner to public entities – may result in investment managers consolidating in their financial statements the assets and liabilities of many hedge funds, private equity funds and other investment funds that they manage.  The draft ASU would defer its application for investment managers’ interests that meet certain criteria.  This article details those criteria, the proposed amendments and the implications for hedge fund managers of the proposed guidance.

“The King of Oil: The Secret Lives of Marc Rich,” By Daniel Ammann; St. Martin’s Press, 302 Pages

Swiss business journalist Daniel Ammann presents a remarkable revisionist view of an ingenious and notorious commodities trader in his new biography “The King of Oil: The Secret Lives of Marc Rich.”  The fugitive who went into Swiss exile in 1983 to escape prosecution for tax evasion and trading with the enemy, and received an explosively controversial presidential pardon on Bill Clinton’s last day in office, finally gets his side of the story told, after decades of bad press that caricatured him as a villainous, traitorous and utterly immoral financier.  Ammann seeks to set the story straight in a sympathetic yet scrupulously even-handed manner, basing his account on hours of rare interviews with the publicity-shy Rich and his associates, as well as information from many other sources familiar with Rich’s business career and his epic legal ordeals.  In a guest article, noted author Joshua A. Lustig reviews Ammann’s book.  In the course of his review, Lustig recounts Rich’s: upbringing; ascent at commodities trading firm Philipp Brothers; trading innovations; 1983 indictment by then-U.S. Attorney for the Southern District of New York Rudy Giuliani; guilty plea; controversial pardon by Bill Clinton; and legacy.

Former Morgan Stanley Executive Patrick Mortimer Joins UBS as Senior Relationship Manager for Prime Brokerage Services

On January 11, 2010, Patrick Mortimer will join UBS AG as a Managing Director and Senior Relationship Manager for Prime Brokerage Services.  Mortimer resigned as Morgan Stanley’s U.S. prime brokerage head last March.