Nov. 9, 2012

Perils Across the Pond: Understanding the Differences Between U.S. and U.K. Insider Trading Regulation

The ongoing crackdown on insider trading has been front page news for some time now.  Pundits have compared the situation to the 1980s when a wave of similar charges were leveled against Wall Street icon Ivan Boesky and other professional investors, bankers and lawyers of that era.  Unlike the 1980s, however, this latest round of insider trading enforcement is not limited to activity in the United States.  This time, foreign regulators have followed suit, bringing their own string of insider trading cases that, on the surface, seem to mirror what has been going on in the United States.  The leader of this pack has been the U.K.’s Financial Services Authority (FSA), which has cast aside its historical reputation as a “light touch” regulator by bringing a series of aggressive and unprecedented “insider dealing” cases against their own high-profile targets.  The FSA has secured 14 criminal convictions related to insider dealing since 2009 and is currently prosecuting another eight individuals on criminal insider dealing charges.  This recent flurry of international insider trading enforcement, coupled with the globalization of the world’s financial markets, subjects investment professionals to a new and unprecedented set of risks.  The crux of the problem is that the rules governing insider trading can differ significantly from jurisdiction to jurisdiction.  In a guest article, Michael A. Asaro and Douglas A. Rappaport, both partners at Akin Gump Strauss Hauer & Feld LLP, and Patrick M. Mott, an associate at Akin Gump, analyze the differences between U.S. and U.K. insider trading laws, and in the process, identify some of the potential pitfalls faced by U.S. investors who are active in investing in the United Kingdom.

Annual Thompson Hine Hedge Fund Seminar Focuses on Implications for Hedge Fund Managers of the JOBS Act, Form PF and Form CPO-PQR

On October 4, 2012, Thompson Hine LLP hosted its annual Hedge Fund Seminar, which this year was entitled, “The JOBS Act and Dodd-Frank – Two Years Later.”  Speakers at the event addressed the impact of Form PF and Form CPO-PQR as well as the anticipated impact of the Jumpstart Our Business Startups (JOBS) Act on hedge fund managers.  In addition, the speakers discussed the building blocks of a culture of compliance at hedge fund management companies.  This article summarizes the most salient points raised at the seminar.

Competing Briefs in Rajaratnam Appeal Outline the Application of Wiretap Law to Hedge Fund Managers

The use of wiretap evidence is the most important innovation in insider trading enforcement in the last five years, and nothing illustrates the evidentiary power of wiretap evidence as starkly as the Rajaratnam trial and conviction.  As the hedge fund industry well knows, on May 11, 2011, after a two-month trial, including 12 days of jury deliberations, Raj Rajaratnam, founder of hedge fund manager Galleon Group, was found guilty of nine counts of securities fraud and five conspiracy counts.  In October 2011, he was sentenced to 132 months in prison and ordered to pay a $10 million fine and to forfeit $53.8 million.  Prior to the Rajaratnam trial, most insider trading cases were based on circumstantial evidence.  But the case against Rajaratnam was based in large part on direct evidence – recordings of over 2,200 of Rajaratnam’s telephone conversations with more than 130 individuals.  As Rajaratnam’s defense team found, it is often difficult or impossible to rebut the validity of wiretap evidence.  Given the comprehensiveness of many wiretaps, it is even difficult in most cases to offer competing interpretations of the same wiretap.  There is no substitute from the prosecutor’s perspective – and little as damning – as a defendant explaining his bad acts in his own words.  Accordingly, the legal fight in connection with wiretaps often relates not to the content of the wiretap but to the validity of the wiretap in the first instance – and this is precisely the fight that Rajaratnam is waging in appealing his conviction to the Second Circuit.  Specifically, on appeal, Rajaratnam alleges that the government engaged in a flawed process in obtaining the warrant to wiretap his phones, and those flaws violated his Fourth Amendment rights as well as the federal wiretap statute.  Rajaratnam also challenges a jury instruction relating to the insider trading charges.  This article provides a feature-length analysis of Rajaratnam’s appeal brief and the government’s reply brief.  In doing so, this article provides a comprehensive view of the law governing wiretaps.  For hedge fund managers, general counsels, outside counsel, compliance officers, portfolio managers and others, it is now important to understand this area of law – an area previously applicable primarily in organized crime and conspiracy cases.  Understanding the law of wiretaps is important for many reasons.  Most notably, if the government wiretaps you or one of your portfolio managers, and if the wiretap bears fruit, there is a good chance that the government will approach you about settling before initiating a formal criminal matter.  If you understand the law of wiretaps – particularly if you can identify any infirmities in the process by which the government obtained its warrant – you will have a significant bargaining advantage vis-à-vis an investment management lawyer that is not conversant with this niche of criminal procedure.  You can hire a good white collar lawyer, of course, but if you understand this area, you will know what to ask and better appreciate the answers.  Our review of the appellate papers in the Rajaratnam matter is intended to highlight the primary legal considerations for the growing number of hedge fund industry participants that are concerned with wiretaps but that are not experts in criminal law and procedure.

Top Ten Operational Risks Facing Hedge Fund Managers and What to Do about Them (Part Two of Three)

This is the second installment in a three part series summarizing the key takeaways from SEI’s “Top 10 Operational Risks: A Survival Guide for Investment Management Firms.”  The first installment discussed a hedge fund manager’s attitude and approach towards operational risk, the need for effective oversight of firm functions and the imperative of appropriate training and staffing to minimize operational risks.  See “Top Ten Operational Risks Facing Hedge Fund Managers and What to Do about Them (Part One of Three),” Hedge Fund Law Report, Vol. 5, No. 40 (Oct. 18, 2012).  This installment addresses information hand-offs, pitfalls in automating processes and workflow documentation.

To What Legal Standard Is a Law Firm Held When Its Client Hedge Fund Invests or Engages in a Fraud?

A perennial question in the case of hedge fund frauds is: How wide is the scope of civil liability?  A hedge fund manager that engages in fraud is almost definitely liable civilly, but frequently has few or no assets to satisfy a judgment.  (A criminal conviction of a manager that engages in fraud may offer symbolic satisfaction to investors, but cannot make investors whole.)  On the other hand, the chain of culpability connecting a hedge fund service provider to a fraud is often attenuated, but service providers usually remain robustly solvent even after a client is exposed as a fraud.  Therefore, in the wake of hedge fund frauds, investors have sued service providers (e.g., law or accounting firms) in an effort to recoup losses.  See “SEC Receiver for Arthur Nadel’s Scoop Capital Hedge Funds Moves to Settle Malpractice Claim Against Law Firm Holland & Knight,” Hedge Fund Law Report, Vol. 5, No. 36 (Sep. 20, 2012).  Investor claims against hedge fund service providers are often tenuous, but offer a real possibility to collect on any judgment.  A recent federal court decision illustrates these themes in connection with a malpractice suit brought against law firm Winston & Strawn (W&S) by the trustee of the estate of bankrupt hedge funds.  This article discusses the factual background in the action; the trustee’s claims against W&S; and the Court’s decision and analysis.

Natixis Global Asset Management Survey Reveals Institutional Investors’ Attitudes Towards Market Volatility, Risk Management, Portfolio Construction, Investment Concerns, Alternative Investments and Investment Priorities

On September 25, 2012, Natixis Global Asset Management, S.A. published the results of its survey of 482 large institutional investors from 13 countries to ascertain their views on various topics, including volatility in financial markets; approaches to risk management; alternative investments; sources of investment concerns; financial regulation; and investment priorities for the next 12 months.  This article describes the survey results.

George Silfen Joins Kramer Levin’s Financial Services Group

On October 31, 2012, Kramer Levin Naftalis & Frankel LLP announced that George M. Silfen has joined the New York office as a partner in the firm’s Financial Services Group.

Terence K. McLaughlin Joins Morrison Cohen LLP

On November 1, 2012, Morrison Cohen LLP announced the admission to the firm of its newest lateral partner, Terence K. McLaughlin, in the firm’s Business Litigation Department.