Sep. 17, 2010

Three Significant Legal Pitfalls for Hedge Fund Marketers, and How to Avoid Them

Until recently, the generally held perception was that the worst a hedge fund marketer could do is fail to raise money.  But then came the credit crisis, a raft of new regulations, a newly enlarged and invigorated SEC and a tectonic shift in the hedge fund investor base in favor of more public and private pension funds and other retirement plans.  In this fraught new operating environment, hedge fund marketers can do more than fail to benefit the fund: they can affirmatively harm the fund and manager.  In particular, marketers can, in different contexts: jeopardize fees; render ideal investors off-limits; subject a manager to complex regulatory schemes from which the manager would otherwise be exempt; and give investors the right to rescind their investments.  This article details three significant legal pitfalls that can give rise to these and other harms, and suggests ways to avoid them.

In Continuing Saga of Collapse of Hedge Fund Parkcentral Global, Brown Investment Management Sues Fund’s Auditor, Ernst & Young, Claiming Fraud, Negligence and Breach of Fiduciary Duty

In late 2008, plaintiff Brown Investment Management, L.P. (Brown) and other investors purchased an aggregate $17 million of limited partnership interests in hedge fund Parkcentral Global, L.P. and Parkcentral Global Fund Limited, both of which fed all their invested assets into Parkcentral Global Hub Limited (Fund).  Despite the Fund’s numerous representations that it would not commit more than 5% of its assets to any one of its investment strategies, or lose more than 5% of net asset value in a worst case scenario, the Fund collapsed in 2008 after making a huge unhedged bet on mortgage backed securities.  The investors’ entire $17 million was wiped out within months.  A 2009 class action is pending against various Fund employees and certain entities allegedly controlled by Ross Perot and his family.  Based in part on the allegations made in the class action, Brown and the other investor plaintiffs now accuse the Fund’s auditor, Ernst & Young, L.L.P., of fraud, negligence and other misdeeds arising out of their preparation of the Fund’s financial statements.  We summarize the allegations made in the complaint and the plaintiffs’ legal theories.

Vitol Capital Management and Affiliate Settle CFTC Charges That They Failed to Disclose the Extent of Information Flow between Them and Thereby Circumvented Position Limits

By Order dated September 14, 2010, Vitol Inc. (VIC) and Vitol Capital Management Ltd. (VCM) settled charges brought by the Commodity Futures Trading Commission (CFTC) that they failed to disclose material information to the New York Mercantile Exchange (NYMEX) and, as a result, were able to circumvent NYMEX position limits for approximately two years.  Specifically, according to the order, VIC and VCM learned in 2007 that NYMEX misperceived the nature of the relationship between VIC and VCM, including the extent to which trading information flowed between the two entities.  While the Order does not say so explicitly, the Order implies that NYMEX was under the impression that VIC and VCM had established robust barriers preventing the flow trading information between the two entities, when in fact they had imposed only limited information barriers.  VIC and VCM were aware of NYMEX’s misperception on this point, but, according to the Order, failed to correct it.  As a result, NYMEX did not aggregate the trading positions of VIC and VCM for purposes of accountability levels and position limits until March 2009.  (NYMEX was acquired by the CME Group in March 2009.)  We describe the allegations and implications of the Order.

Connecticut Attorney General Sues Chief Investment Officer of Wesleyan University and Hedge Funds with which CIO was Affiliated for Inappropriate Use of University Resources

In a complaint filed in the Middlesex Superior Court in Connecticut on August 12, 2010, Connecticut Attorney General Richard Blumenthal accused Thomas Kannam, the former Chief Investment Officer (CIO) of Wesleyan University, along with two hedge fund management companies and one operating company with which Kannam was affiliated, of breach of fiduciary duty and other legal violations.  Specifically, Blumenthal alleged that Kannam violated his fiduciary duty to the University by knowingly causing University Endowment funds to be used for his own personal benefit or the benefit of the hedge fund managers and operating company with which he was affiliated, in contravention of his duty of loyalty to the University.  This article details the factual and legal allegations in Blumenthal’s complaint.  The complaint may have broader relevance within the hedge fund community because of the mobility between employment as an endowment CIO and principal at a hedge fund management company.  That is, for hedge fund managers looking to hire former endowment CIOs, it is important to understand what level of pre-employment affiliation is permissible.  Even for managers who are not looking to hire current or former endowment CIOs, but are merely looking to do business with them in their capacity as CIOs, the complaint helps demarcate the line between permissible and impermissible conduct.

Events: The Hedge Fund Industry – The Year in Review and What to Expect in 2011

Please join Mesirow Financial Consulting, LLC, Rothstein Kass and Tannenbaum Helpern Syracuse & Hirschtritt, LLP for a Q&A session moderated by Mike Pereira, Publisher of the Hedge Fund Law Report.  Presenters: Stephen B. Darr, Senior Managing Director, Mesirow Financial Consulting and Mesirow Financial Consulting Capital; Howard Altman, Co-CEO and Co-Managing Principal of Rothstein Kass and Principal-in-Charge of the Financial Services Group; Ricardo W. Davidovich, Partner, Tannenbaum Helpern Syracuse & Hirschtritt LLP – Financial Services, Private Funds and Capital Markets.  Discussion Topics: US Regulation/Dodd-Frank, EU Directive, Best Practices/Internal Controls, Valuation, Litigation, Liquidation, New Products, Opportunities, Risks; Date, Time and Location: Thursday, September 30, 2010; 4:30 p.m. – 6:00 p.m. – Program and Q&A Session; 6:00 p.m. – 7:00 p.m. – Cocktail Reception; The Yale Club of New York City, 50 Vanderbilt Avenue, New York, NY 10017.

Kramer Levin Expands Private Equity Practice with Addition of Two Lateral Partners

On September 7, 2010, Kramer Levin Naftalis & Frankel LLP announced an expansion of its private equity practice with the addition of James J. Moriarty and Russell J. Pinilis as Partners in the firm’s New York office.  Prior to joining Kramer Levin, Moriarty and Pinilis were Partners at O’Melveny & Myers.

Stephen G. Bondi Joins van Biema Value Partners as Chief Operating Officer

On September 8, 2010, van Biema Value Partners, LLC announced that Stephen G. Bondi has been appointed Chief Operating Officer of the company.

Equinox Capital Markets Hires Michel Serieyssol as Managing Director Focused on Fund Marketing

On September 14, 2010, alternative investment marketing and business development firm Equinox Capital Markets announced the appointment of Michel Serieyssol as Managing Director.