Oct. 13, 2011

The Implications of UCITS IV Requirements for Asset Management Functions

Undertakings for Collective Investment in Transferable Securities (UCITS) IV raised much industry debate prior to its introduction on July 1, 2011 across a number of areas.  Now, with the opportunity to begin assessing its implications in practice, it is likely that this debate will continue.  One area that is receiving increasing focus is the MiFID-esque conduct of business rules imposed on UCITS management companies (and self-managed UCITS) under the UCITS IV Management Company Directive.  In almost all cases at present, UCITS management companies (and self-managed UCITS) fully outsource the asset management function to one or more investment management firms.  These firms are now finding themselves directly subject to UCITS IV conduct of business rules.  So just how much will UCITS IV impact how investment managers manage UCITS?  In this article, Stephen Carty, a partner in the Dublin office of international law firm Maples and Calder, considers the new and enhanced policies and procedures that will be required as well as considering some of the practical implications.  In particular, Carty discusses: UCITS IV rules with respect to best execution, order handling and aggregation, due diligence and voting rights policies; the general absence of carve outs in UCITS IV; the lack of account in UCITS IV for the delegation model typical in the investment management field; and the differences in four important areas between UCITS IV and the MiFID regime.

SEC Enforcement Action Against a Private Equity Fund Manager Partner Calls into Question the Value of Self-Reporting in the Private Funds Context

The SEC recently brought an enforcement action against a partner of a private equity fund manager for allegedly usurping investment opportunities that belonged – under fiduciary duty principles and fund and manager documents – to the manager’s funds.  According to the order in the matter (Order), the manager had robust compliance policies and procedures in place, conducted an internal investigation and self-reported the partner’s alleged bad acts to the SEC.  The Enforcement Division brought an action against the partner, but did not name the firm itself in the action.  From the perspective of the manager, the fact that it was not named is a good thing, but the fact of the action itself is a bad thing.  For other private fund managers contemplating self-reporting, the important question raised by this matter is the extent to which self-reporting dissuaded the SEC from charging the manager in addition to the partner.  In an effort to answer that question – or at least to refine and particularize it – this article describes the factual and legal allegations in the Order, then discusses the implications of the matter for hedge and private equity fund managers.

What Should Hedge Fund Investors Be Looking For in the Course of Operational Due Diligence and How Can They Find It?

As previously reported in the Hedge Fund Law Report, on September 13, 2011, ALM Events hosted its fifth annual Hedge Fund General Counsel Summit at the Harvard Club in New York City.  See “Fifth Annual Hedge Fund General Counsel Summit Covers Insider Trading, Expert Networks, Whistleblowers, Exit Interviews, Due Diligence, Examinations, Pay to Play and More,” Hedge Fund Law Report, Vol. 4, No. 33 (Sep. 22, 2011).  One of the panels at that Summit dealt with operational due diligence, an increasingly important topic in the hedge fund world.  See “Six Principles of Operational Due Diligence,” Hedge Fund Law Report, Vol. 4, No. 34 (Sep. 29, 2011).  One of the participants on the due diligence panel was William Woolverton, Senior Managing Director and General Counsel at fund of funds manager Gottex Fund Management.  We reported on some of Woolverton’s insights in our article on the Summit.  Following the Summit, we had the privilege of digging deeper into Woolverton’s thinking on operational due diligence in the form of an interview.  Gottex is a major investor in underlying hedge funds, and Woolverton participates materially in the operational due diligence process.  He speaks, accordingly, with the authority of experience, and his insights are relevant to investors honing their approach to due diligence, managers refining their responses to due diligence and others concerned with the hedge fund due diligence process.  This issue of the Hedge Fund Law Report contains the full transcript of our interview with Woolverton, which covered the following topics, among others: the specific non-investment aspects of the hedge fund business covered by operational due diligence; how managers can maintain the consistency of answers across people and documents; how managers can address requests for proprietary or confidential information; whether a manager should disclose an important disciplinary event, even if an investor does not ask about it; what investors can get from on-site visits that they cannot get remotely; whether integration clauses in fund documents have any value in light of the apparent ability of investors to sue based on oral representations by managers; the interaction among side letters, disclosure and certain regulatory developments; and what specific items investors should be looking for in background checks of managers.

Hedge Fund Healey Alternative Investment Partnership’s Complaint Against Royal Bank of Canada for Failure to Pay Full Cash Settlement Value of Equity Barrier Call Option Agreement Survives Bank’s Motion to Dismiss

Plaintiff Hedge Fund Healey Alternative Investment Partnership (Fund) purchased a cash-settled equity barrier call option from defendants Royal Bank of Canada and RBC Dominion Securities Corporation (together, Bank).  The option agreement referenced a basket of financial assets, including interests in hedge funds.  However, the Bank was not obligated to own those assets.  In September 2008, the Bank’s monthly report on the option agreement showed its value to be almost $22 million.  The Fund formally terminated the option agreement as of June 30, 2009.  The Bank paid about $9.16 million to the Fund, but refused to pay any further amounts, claiming that it was unable to value certain hedge fund interests, particularly hedge fund investments held in side pockets.  The Fund sued the bank, claiming breach of contract, breach of fiduciary duty and breach of the covenant of good faith and fair dealing.  The Bank moved to dismiss for failure to state a cause of action.  This article provides a comprehensive summary of the factual background and the District Court’s legal analysis.

SEC Accuses Corey Ribotsky and Hedge Fund Manager NIR Group, LLC of Misappropriating Assets and Misleading Investors in Connection with PIPEs

On September 28, 2011, the SEC filed a civil complaint in the United States District Court for the Southern District of New York against an unregistered hedge fund management firm, The NIR Group, LLC (NIR), its sole managing member, Corey Ribotsky, and an NIR analyst, Daryl Dworkin (together, defendants).  This article details the allegations in the SEC’s complaint and briefly outlines NIR’s press release in response.  See also “New York Appellate Division Dismisses Investors’ Complaint Against Corey Ribotsky and Hedge Fund AJW Qualified Partners, Holding that Fund’s Decision to Suspend Redemptions Did Not Constitute a Breach of the Fund’s Operating Agreement or a Breach of Fiduciary Duty,” Hedge Fund Law Report, Vol. 4, No. 16 (May 13, 2011); “Investors Sue Hedge Fund Managed By N.I.R. Group and Corey Ribotsky in Redemption Dispute,” Hedge Fund Law Report, Vol. 2, No. 32 (Aug. 12, 2009).

Public Pension Funds and Endowments Increase Allocations to Hedge Funds, While Allocations from Family Offices Slide

On September 27, 2011, investment management software and services provider PerTrac hosted a webinar entitled “Institutional Asset Allocation: The Latest Trends From Pensions, Family Offices and Endowments.”  Lois Peltz, of information service provider Infovest21, delivered the presentation, which was the second of a two-part series.  The presentation laid out the results of Infovest21’s recent study (Study) of where and how family office, public pension fund and endowment assets are being allocated.  See “Developments in Family Office Regulation: Part Three,” Hedge Fund Law Report, Vol. 4, No. 23 (Jul. 8, 2011).  The purpose of the event was to keep hedge fund managers, among others, up to date on investing trends and provide insight into how institutional investors are making investment decisions.  See “Implications for Hedge Funds of a Potential Paradigm Shift in Pension Fund Allocation Strategies,” Hedge Fund Law Report, Vol. 3, No. 16 (Apr. 23, 2010).  This article summarizes the salient ideas and investment trends discussed in the course of the webinar.

AsiaHedge Study Finds That a Growing Proportion of Hedge Funds with Asia-Focused Strategies are Managed From Asia

A September 2011 survey (Survey) by AsiaHedge Research uncovered data with respect to: assets under management (AUM) by Asia-based hedge fund managers and Asia-focused strategies; AUM trends; the composition of the investor base in Asia-focused funds; the evolving industry structure; the level of AUM in Asia-focused hedge funds managed from within the region versus from outside of the region; the amount of assets managed from various sub-regions in or focused on the region; and the top Asia-focused strategies by AUM.  This article details the key points from the Study.

Galleon Management, LLC Founder Raj Rajaratnam Sentenced to 11 Years in Prison for Insider Trading

On October 13, 2011, U.S. District Judge Richard J. Holwell sentenced Galleon Management, LLC founder Raj Rajaratnam, 54 years old, to 11 years in prison.  See “Implications of the Rajaratnam Verdict for the ‘Mosaic Theory,’ the ‘Knowing Possession’ Standard of Insider Trading and Criminal Wire Fraud Liability in the Absence of a Trade,” Hedge Fund Law Report, Vol. 4, No. 18 (Jun. 1, 2011).  About five months ago, on May 11, 2011, Rajaratnam was convicted of all 14 counts of conspiracy and securities fraud with which he was charged, following an eight-week jury trial.  See “On Motion to Set Aside Verdict, Trial Court Upholds All Fourteen Counts of Rajaratnam Insider Trading and Conspiracy Conviction,” Hedge Fund Law Report, Vol. 4, No. 30 (Sep. 1, 2011).  According to the U.S. Attorney’s Office for the Southern District of New York, Rajaratnam’s sentence is the longest sentence to be imposed for insider trading in history.  See “Strategies for Avoiding Insider Trading Violations: A Perspective Informed by SEC Service, Private Law Firm Practice and Work as General Counsel of a Hedge Fund Manager,” Hedge Fund Law Report, Vol. 4, No. 34 (Sep. 29, 2011).  In addition to his prison term, Rajaratnam was sentenced to two years of supervised release, ordered to pay forfeiture in the amount of $53,816,434 and ordered to pay a $10 million fine.  Rajaratnam is scheduled to surrender to authorities on November 28, 2011.  See “How Can Hedge Fund Managers Update Their Insider Trading Compliance Programs to Reflect the SEC’s Focus on Systemic Violators, Gatekeepers, Trading Patterns, Profitable Trades and Expert Networks?,” Hedge Fund Law Report, Vol. 4, No. 28 (Aug. 19, 2011).

Bankruptcy & Restructuring Lawyer Geoffrey T. Raicht Joins Proskauer as Partner in New York

On October 10, 2011, Proskauer announced that Geoffrey T. Raicht joined the firm as a partner in its New York office.  At Proskauer, Raicht plans to represent private equity funds and their portfolio companies, as well as liquidators of hedge funds.  See “When Does the SEC Acquire the Right to Freeze the Assets of a Hedge Fund or Appoint a Receiver over a Hedge Fund?,” Hedge Fund Law Report, Vol. 4, No. 17 (May 20, 2011).  On bankruptcy investing by hedge funds, see “WaMu Bankruptcy Judge Allows Equity Committee’s Action for Equitable Disallowance of Hedge Fund Noteholders’ Claims to Proceed on the Ground that Equity Committee Stated a ‘Colorable Claim’ that those Noteholders Engaged in Insider Trading,” Hedge Fund Law Report, Vol. 4, No. 35 (Oct. 6, 2011).

Fatima S. Sulaiman Returns to the Hedge Fund Practice of K&L Gates

On October 12, 2011, the Washington, D.C. office of K&L Gates LLP announced the return of Fatima S. Sulaiman as a partner in the firm’s investment management, hedge funds and alternative investments practice, where she previously practiced from 1997 to 2009.