Sep. 1, 2011

On Motion to Set Aside Verdict, Trial Court Upholds All Fourteen Counts of Rajaratnam Insider Trading and Conspiracy Conviction

Raj Rajaratnam, founder of hedge fund manager Galleon Group, was convicted on May 11, 2011 of fourteen counts of securities fraud and conspiracy to commit securities fraud arising out of years of alleged insider trading.  He moved for a judgment of acquittal on all counts on the basis that the government failed to present sufficient evidence to convict him.  The Trial Court has upheld the conviction in its entirety.  This article offers a comprehensive overview of the Court’s decision and legal analysis.  See also “Investment Research and Insider Trading on ‘Outside Information’,” Hedge Fund Law Report, Vol. 4, No. 29 (Aug. 25, 2011).

Recent CFTC Settlement with Former Moore Capital Trader Illustrates a Number of Best Compliance Practices for Hedge Fund Managers that Trade Commodity Futures Contracts

The Commodity Futures Trading Commission (CFTC) recently entered an order (Order) settling charges that former Moore Capital trader Christopher Louis Pia attempted to manipulate the settlement prices of palladium and platinum futures contracts by “banging the close.”  Specifically, the CFTC alleged that Pia caused market-on-close (MOC) buy orders to be entered in the last ten seconds of the closing periods for both types of contracts in an effort to exert upward pressure on the settlement prices for the contracts.  The Order has attracted considerable attention for various reasons, including the prominence of Moore Capital, the obscure allure of the metals at issue and the Wall Street Journal’s report that Pia “tooled around town in an orange Lamborghini.”  But less attention has been paid to the more important implications of the Order for the hedge fund industry.  Those implications fall into two general categories, one of which focuses on best compliance practices for hedge fund managers that trade commodity futures contracts.  This article discusses the factual allegations and legal analysis in the Order, then outlines some of the more noteworthy implications of the Order for hedge fund managers focused on commodities.  See also “CFTC and SEC Propose Rules to Further Define the Term ‘Eligible Contract Participant’:  Why Should Commodity Pool and Hedge Fund Managers Care?,” Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).

Nine Steps That Hedge Fund Managers Should Take to Develop a Defensible Electronic Discovery Strategy

Few hedge fund managers spend adequate time proactively considering the risks associated with electronic discovery (e-discovery) before they face a lawsuit or an investigation.  Then, when it is too late to be proactive, managers typically scramble and over-collect data, substantially increasing their e-discovery costs, or they miss data, leading to claims of spoliation and sanctions.  See “Pension Committee Case Highlights Obligations of Hedge Fund Managers to Preserve Documents and Information in Anticipation of Litigation,” Hedge Fund Law Report, Vol. 3, No. 6 (Feb. 11, 2010).  While hedge fund managers have limited control over whether their funds or management companies are sued or audited, managers can adopt best practices that will help manage the risks and costs associated with e-discovery.  In a guest article, Jon Resnick, worldwide vice president of field operations at Applied Discovery, and Monte Mann, a partner at Novack and Macey LLP, describe nine categories of actions that hedge fund managers should take, and two categories of actions that hedge fund managers should avoid, to develop a sound, defensible e-discovery strategy.

Massachusetts Securities Division Adopts Final Regulation on the Use of Expert Network Services by Hedge Fund Managers

On August 8, 2011, the Massachusetts Securities Division (Division) adopted a final regulation on the use by hedge fund managers of expert network services.  The Division had proposed the recently finalized regulation four months earlier.  See “Massachusetts Securities Division Proposes Regulation on the Use by Hedge Fund Managers of Expert Networks,” Hedge Fund Law Report, Vol. 4, No. 14 (Apr. 29, 2011).  One of the stated goals of the final regulation is to “provide investment advisers with greater clarity as to what is impermissible conduct when paying consultants for information.”  However, the final regulation appears to be redundant of existing commercial standards and unlikely on its face to prevent the sort of conduct that motivated the Division’s rulemaking.  See “Massachusetts Commences Civil Securities Fraud Enforcement Action against Hedge Fund Investment Adviser Risk Reward Capital Alleging that the Hedge Fund Traded on Inside Information Provided through an Expert Network,” Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).  Quite apart from providing the intended clarity, the final regulation may constitute a missed opportunity to provide much-needed guidance to the expert network industry and a template for similar state and federal efforts.  This article explains: the mechanics of the final regulation; the three primary changes from the proposed regulation; the Division’s view of the burden to be imposed by the final regulation on expert network firms; whether the final regulation is preempted by federal law; timing of effectiveness of the final regulation; who the final regulation does and does not cover; and four substantive criticisms of the final regulation.

Citi Announces Appointment of Christy York as Managing Director and Head of Capital Introduction for Europe, Middle East and Africa

On August 24, 2011, Citi announced that Christy York has been appointed Managing Director and Head of Capital Introduction for its Prime Finance business in the Europe, Middle East and Africa (EMEA) region.  Pure capital introduction activities may not require broker-dealer registration, although many entities that make such introductions are already registered as broker-dealers.  However, more active intermediation and related compensation structures may require broker-dealer registration.  See “Is the In-House Marketing Department of a Hedge Fund Manager Required to Register as a Broker?,” Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).  Moreover, intermediaries of hedge fund interests now have to contend with lobbying laws.  See “How Can Hedge Fund Managers Structure the Compensation of Third-Party Marketers in Light of the Ban On ‘Contingent Compensation’ Under New York City and California Lobbying Laws? (Part Two of Three),” Hedge Fund Law Report, Vol. 4, No. 13 (Apr. 21, 2011).