Sep. 20, 2012

How Should Hedge Fund Managers Handle and Document Investor Complaints?

Not all hedge fund investors are satisfied customers, but not all dissatisfied hedge fund customers sue or seek to arbitrate.  A halfway house between legal action and no action is the investor complaint – an expression of dissatisfaction with some aspect of the investment relationship, which need not relate to performance.  Good performing hedge fund managers can (and do) receive investor complaints, and the most formidable types of complaints frequently relate to matters other than performance, for example, the legality or propriety of conduct of manager personnel.  Adaptive hedge fund managers have developed an infrastructure and style for responding to complaints, and view them as an opportunity to engage investors and other constituencies.  Lesser managers bristle at any whiff of criticism, though that is a bad strategy for all involved; from the investor perspective, part of the job of a hedge fund manager is engaging with reasonable investor inquiries, including justified complaints.  Moreover, given the relatively small size of the hedge fund investor universe (at least compared to the retail investing population), the SEC’s whistleblower bounty program and competition for scarce assets, appropriately calibrated responses to investor complaints can have implications for marketing, reputation and regulatory relations.  In short, navigating the investor complaint process is a relatively novel challenge in the hedge fund industry, but an increasingly important one.  To help hedge fund managers think through the various components of this challenge, this article discusses: what constitutes an investor complaint; who within the management company should receive such complaints; how investor complaints should be investigated and addressed; when to notify the general counsel of an investor complaint; how to determine the appropriate course of action, including whether, when and how to respond to complaints; and how to document a complaint.

The Cayman Islands Weavering Decision One Year Later: Reflections by Weavering’s Counsel and One of the Joint Liquidators

Last month marks the one-year anniversary of the decision handed down by the Grand Court of the Cayman Islands (Court) against the directors of Weavering Macro Fixed Income Fund, in which both directors were found to have breached their duties and were ordered to pay damages in the amount of USD$111 million.  In the days and weeks which followed, many stakeholders offered their own critique of the decision as well as the “checklist” promulgated by Mr. Justice Andrew Jones QC of the steps which an independent non-executive director of an investment fund should take in order to properly discharge his duties.  Some critiques were lucid and objective dispositions of the decision, and some were not.  Perhaps it was the size of the award, or that it was the first time that directors of a failed Cayman Islands investment fund had been found liable in damages for a fund’s losses, which provoked such interest; but no doubt the views expressed by many were, and are, influenced by personal circumstances.  But what has been the true impact of the decision, and what mark has it left on the laws relating to directors generally?  In this article Mourant Ozannes’ Shaun Folpp, who acted for Weavering with respect to both the first instance proceedings and the recent appeal, and Mr. Ian Stokoe of PwC Corporate Finance and Recovery (Cayman) Limited, one of Weavering’s Joint Official Liquidators, explore these very issues, and reflect on one of the most talked about decisions ever to be handed down by the Court.  For background on the decision, see “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,” Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011).

Illinois Appellate Court Rules on Whether a Hedge Fund Manager Can Compel Arbitration Based on an Agreement between a Fund Investor and a Clearing Broker

In a recent state court action, a hedge fund manager and fund moved to compel arbitration in their dispute with a fund investor, despite the absence of an explicit agreement between them to arbitrate disputes.  S. Louis Rathje (Plaintiff) sued Illinois-based investment firm Horlbeck Capital Management, LLC (HCM); HCM, L.P., a hedge fund (Fund); Todd Horlbeck, the manager/owner of HCM; and Stacey Kellogg, Horlbeck’s assistant (collectively, Defendants), based on losses allegedly caused by misvaluation of Plaintiff’s Fund investment.  The Defendants moved to compel arbitration based on clauses contained in agreements the Plaintiff executed with a broker-dealer and clearing broker when he invested in the Fund.  The Defendants were not parties to those agreements.  This article describes the factual background in the case, the Court’s ruling and the legal analysis supporting the Court’s decision on the Defendant’s motion to compel arbitration.

Bankruptcy Trustee of Banyon Hedge Funds Sues Crime Insurance Carriers and Broker Over Refusal to Pay on Crime Insurance Claim With Respect to Scott Rothstein/RRA Ponzi Scheme

Hedge fund managers typically procure various categories of insurance coverage with respect to their activities, including directors and officers (D&O) insurance, errors and omissions insurance and crime insurance coverage.  See “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).  However, as in many categories of insurance, insurers sometimes resist paying claims made by hedge fund managers.  A defense to payment of claims typically asserted by insurers is that the insured, e.g., the hedge fund manager, made misrepresentations on the insurance application.  An example of this type of dispute is the recent litigation between Level Global, L.P. and XL Special Insurance Company.  See “New York District Court Orders Insurer XL to Advance Defense Costs to Level Global Under D&O Policy,” Hedge Fund Law Report, Vol. 5, No. 27 (Jul. 12, 2012).  Another dispute of this type was recently initiated when eight insurers refused to pay out on a claim for $70 million in crime insurance procured by a group of hedge fund managers.

Preqin Study Reveals Institutional Investors’ Latest Views and Expectations on Hedge Fund Terms

Effective hedge fund marketing requires a thorough understanding of the target audience, which increasingly consists of institutional investors.  To deepen the appreciation of hedge fund managers for the concerns, goals and expectations of institutional investors, alternative investment data firm Preqin Ltd. recently published a study on institutional investors’ views on hedge fund fee terms, transparency, liquidity and other aspects of the manager-investor relationship.  This article highlights the key findings of the study.

SEC Receiver for Arthur Nadel’s Scoop Capital Hedge Funds Moves to Settle Malpractice Claim Against Law Firm Holland & Knight

In January 2009, hedge fund sponsor Arthur Nadel disappeared, and his $300 million Ponzi scheme collapsed.  Law firm Holland & Knight LLP, and one of its partners (together, H&K), had provided legal services to Nadel’s funds and management companies.  A receiver for Nadel’s funds was appointed at the request of the Securities and Exchange Commission.  As part of his efforts to recover funds for investors, the receiver sued H&K for malpractice.  H&K has recently agreed to settle that malpractice litigation for $25 million.  The receiver has asked the court supervising the receivership to approve the settlement.  This article provides background on Nadel’s fraud and summarizes the terms of the H&K settlement.

ACA Compliance Group Hires Erik Olsen as Senior Principal Consultant

On September 18, 2012, ACA Compliance Group (ACA) announced that Erik Olsen has joined the company as Senior Principal Consultant, responsible for leading compliance examinations and advising investment advisers and private fund managers on various compliance matters.  See “ACA Webcasts Detail Exempt Reporting Adviser Qualifications and Compliance Obligations,” Hedge Fund Law Report, Vol. 5, No. 10 (Mar. 8, 2012).

Seasoned Regulatory Partners Expand Haynes and Boone’s Financial Regulatory Practice

On September 12, 2012, Haynes and Boone, LLP announced that it has added two new lateral partners, Daren Domina and Madelyn Calabrese, to the firm’s Investment Funds and Private Equity Practice Group in New York.