Sep. 8, 2011

Gold Investment Alternatives for Hedge Fund Managers

Many hedge fund managers have a view with respect to gold, but few know how to put such a view into practice.  In a guest article, David A. Gulley, a Senior Managing Director at Mesirow Financial Consulting, LLC, and veteran gold banker Ian C. MacDonald, detail the benefits, burdens and mechanics of six distinct methods of investing in gold, the price of gold or gold-related trends.  In addition, Gulley and MacDonald provide a comprehensive discussion of historical, cultural and practical issues relating to gold.

Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations

In a judgment with serious implications for those who serve as directors of Cayman Islands hedge funds, the Grand Court of the Cayman Islands has ruled that Stefan Peterson and Hans Ekstrom, who were the independent directors of Weavering Macro Fixed Income Fund Limited (Fund), were personally liable for $111 million of excess redemption payments that had been made by the Fund using a wildly inflated net asset value.  The Court found that those directors had willfully neglected their duties to supervise the operation of the Fund and had served as little more than rubber stamps for the Fund’s founder, Magnus Peterson.  They missed or ignored critical – and obvious – signs that something was seriously amiss with the Fund.  The Court’s judgment, summarized in this article, provides a useful roadmap for the level of engagement, due diligence and oversight required of directors of Cayman Islands hedge funds.  For our original coverage of the Fund’s collapse, see “The Weavering Blow-Up and What It May Mean for Boards of Directors of Cayman Islands Hedge Funds,” Hedge Fund Law Report, Vol. 2, No. 13 (April 2, 2009).  For a discussion of the role that non-executive directors should play in the governance of offshore hedge funds and the protection of investors, see “The Case In Favor of Non-Executive Directors of Offshore Hedge Funds with Investment Expertise, Fewer Directorships and Independence from the Manager,” Hedge Fund Law Report, Vol. 3, No. 50 (Dec. 29, 2010), and a letter to the editor in response, “The Case in Favor of Focused, Experienced and Independent Hedge Fund Directors,” Hedge Fund Law Report, Vol. 4, No. 3 (Jan. 21, 2011).

Spreadsheets Can Stunt a Hedge Fund Manager’s Growth

Prime broker and technology provider Merlin Securities recently published a white paper entitled “The Importance of Business Process Maturity and Automation in Running a Hedge Fund.”  Broadly, the white paper does four things.  First, it identifies business process automation as fundamental to various aspects of the hedge fund management business, including growth (in assets, strategies, personnel, etc.), marketing and avoidance of major mistakes.  Second, it provides a framework for determining a manager’s level of business process automation.  Third, it offers a method for assessing whether a manager’s level of business process automation is too much, too little or just right in light of where the manager is in its lifecycle.  And fourth, for managers with too little or too much automation in light of their stage of growth, the white paper examines the three primary strategies for getting to what it terms the “automation sweet spot.”  The fundamental insights of the white paper are that the hedge fund management business is becoming more “institutional,” and that business process automation is an important element of institutionalization.  It is hard to say whether managers are becoming more institutional because more assets are coming from institutional investors (as opposed to, for example, high net worth individuals), or whether institutional investors are becoming more open to investments in hedge funds because managers are becoming more institutional.  The answer is probably a bit of both, but for practical purposes, the answer is moot: managers that seek assets from major institutional investors have to “act institutional.”  What this Merlin white paper adds to the discussion is a way of thinking about what it means to act institutional from a business process perspective.  This white paper is the latest in a series of white papers from Merlin Securities, and we at the Hedge Fund Law Report have reported on prior Merlin white papers.  See, e.g., “Eight Refinements of the Traditional ‘2 and 20’ Hedge Fund Fee Structure That Can Powerfully Impact Manager Compensation and Investor Returns,” Hedge Fund Law Report, Vol. 4, No. 17 (May 20, 2011) (discussing, among other things, the Merlin white paper entitled “The Business of Running a Hedge Fund: Best Practices for Getting to the ‘Green Zone’”); and “Prime Broker Merlin Securities Develops Spectrum of Hedge Fund Investors; Event Hosted by Accounting Firm Marcum LLP Examines Marketing Implications of the Merlin Spectrum,” Hedge Fund Law Report, Vol. 3, No. 39 (Oct. 8. 2010) (discussing, among other things, the Merlin white paper entitled “The Spectrum of Hedge Fund Investors and a Roadmap to Effective Marketing”).

Second Circuit Upholds $60 Million Restitution Order against Matthew Marino for Serving as an Employee of the Fictitious Accounting Firm That Helped Facilitate the Bayou Hedge Fund Fraud

On August 18, 2011, the United States Court of Appeals for the Second Circuit upheld a district court’s $60 million restitution order imposed on Matthew Marino (defendant) to repay the victims of the Bayou hedge fund group Ponzi scheme orchestrated by his brother Daniel Marino, Samuel Israel III and James Marquez.  As previously reported in the Hedge Fund Law Report, Daniel Marino, Israel and Marquez engaged in a Ponzi scheme using the Bayou group of hedge funds, which cost investors – according to numbers in the Second Circuit’s decision – upwards of $500 million.  For a discussion of the mechanics of the Ponzi scheme, as well as a detailed analysis of relevant litigation, see “Recent Bayou Judgments Highlight a Direct Conflict between Bankruptcy Law and Hedge Fund Due Diligence Best Practices,” Hedge Fund Law Report, Vol. 4, No. 25 (Jul. 27, 2011).  The likelihood of collecting $60 million from Marino is probably as fanciful as the “independent auditor” that purportedly employed him.  Nonetheless, the decision evidences the willingness of an important appellate court to cast a wide net of liability and restitution in connection with a hedge fund Ponzi scheme.  Accordingly, the decision may bear on – among other legal and investment matters – the value of claims in connection with other or future frauds.  See “Two Key Levels of Risk Facing Hedge Funds That Buy or Sell Bankruptcy Claims,” Hedge Fund Law Report, Vol. 4, No. 27 (Aug. 12, 2011).  This article details the relevant factual background and the Court’s legal analysis.

Citadel Commences Action Against a Former Employee for Misappropriation of Confidential Information with the Intent to Aid a Competitor

Useful proprietary trading technologies are expensive to develop, easy to copy and significantly undermined if obtained by a competitor.  Not surprisingly, therefore, a significant body of civil and criminal case law, as well as commercial best practices, have developed around the protection of proprietary trading technology.  On the civil side, for example, the allegations in a complaint filed on August 29, 2011, by Citadel LLC (Citadel) against former employee Yihao Ben Pu (Pu), echo legal allegations brought by Citadel in July 2009 against the founders of Teza Technologies (Teza), and allegations in unrelated complaints.  See “Citadel Investment Group Sues Former Employees Alleging Violations of Non-Disclosure, Non-Solicitation and Non-Compete Agreements,” Hedge Fund Law Report, Vol. 2, No. 28 (Jul. 16, 2009); “Opus Trading Fund Accuses Former Trader That Joined Competitor of Breach of Contract and Misappropriation of Proprietary Information,” Hedge Fund Law Report, Vol. 4, No. 13 (April 21, 2011); “New York Trial Court Permits Action for Misappropriation of Hedge Fund Proprietary Software and Breach of Partnership Agreement To Proceed,” Hedge Fund Law Report, Vol. 2, No. 6 (Feb. 12, 2009).  On the criminal side, the most notable recent case was the DOJ’s action against Sergey Aleynikov, who joined Teza from Goldman Sachs.  See “Protecting Hedge Funds’ Trade Secrets: The Federal Government’s Enforcement of Criminal Laws Protecting Proprietary Trading Strategies,” Hedge Fund Law Report, Vol. 3, No. 48 (Dec. 10, 2010).  Regarding commercial best practices for protection of trading technology in the hedge fund context, see “How Can Hedge Fund Managers Prevent Theft of Proprietary Trading Technology and Other Intellectual Property?,” Hedge Fund Law Report, Vol. 2, No. 33 (Aug. 19, 2009).  This article details the allegations in Citadel’s complaint against Pu, and concludes with a note on the procedural posture of the matter.

Paul, Weiss Adds Private Funds Partner Udi Grofman to Investment Management Practice

On September 6, 2011, Paul, Weiss, Rifkind, Wharton & Garrison LLP announced that Udi Grofman joined the firm as a corporate partner in its New York office.  Grofman has been quoted in the Hedge Fund Law Report.  See “Legal and Investment Considerations in Connection with Closing Hedge Funds to New Investors or Investments,” Hedge Fund Law Report, Vol. 3, No. 37 (Sep. 24, 2010); “Certain Hedge Funds are Using Enhanced Investor Liquidity as a Marketing Tool,” Hedge Fund Law Report, Vol. 2, No. 22 (Jun. 3, 2009).

David Vaughan Returns to Dechert from SEC Division of Investment Management

On September 7, 2011, law firm Dechert LLP announced that David A. Vaughan returned to the firm as a partner in the Financial Services Group.  Vaughan left Dechert in March 2009 to join the U.S. Securities and Exchange Commission’s Division of Investment Management, where he served for the last two years as the senior private fund policy adviser on all aspects of legal and regulatory policy related to private funds.  Prior to leaving Dechert to join the SEC, Vaughan was frequently quoted in the Hedge Fund Law Report.  See, e.g., “Seeking a Way Out: Hedge Fund Investors Turning to Secondary Market to Get Out of Investments,” Hedge Fund Law Report, Vol. 1, No. 23 (Oct. 28, 2008); “The Freedom of Information Act: A Crack in the Confidentiality of Disclosed Short Sale Data?,” Hedge Fund Law Report, Vol. 1, No. 28 (Dec. 16, 2008).

O’Melveny Adds Tim Clark as Partner in Investment Funds and Securitization Practice in New York

On September 6, 2011, O’Melveny & Myers LLP announced that Timothy M. Clark joined the firm as a partner in its Investment Funds and Securitization Practice in New York.  Clark has been quoted frequently in the Hedge Fund Law Report.  See, e.g., “Key Legal Considerations in Connection with the Movement of Talent from Proprietary Trading Desks to Start-Up or Existing Hedge Fund Managers: The Hedge Fund Manager Perspective (Part Three of Three),” Hedge Fund Law Report, Vol. 4, No. 4 (Feb. 3, 2011); “Hedge Fund Managers and Investors Turning to Dutch Auctions as an Alternative to Secondary Markets for Hedge Fund Interests,” Hedge Fund Law Report, Vol. 2, No. 10 (Mar. 11, 2009); “Secondary Market Develops in Special Purpose Vehicle Interests as Use of SPVs to Effect Redemptions Becomes More Common,” Hedge Fund Law Report, Vol. 2, No. 16 (Apr. 23, 2009); “Should Hedge Funds Participate in the Public-Private Investment Program?,” Hedge Fund Law Report, Vol. 2, No. 13 (Apr. 2, 2009).

David C. Wolinsky Joins Otterbourg

On September 8, 2011, law firm Otterbourg, Steindler, Houston & Rosen, P.C. announced that David C. Wolinsky joined the firm as Of Counsel.