Nov. 21, 2012

Fund Manager CR Intrinsic and Former SAC Portfolio Manager Are Civilly and Criminally Charged in Alleged “Record” $276 Million Insider Trading Scheme

On November 20, 2012, the SEC filed a civil complaint charging hedge fund manager CR Intrinsic Investors, LLC (CR Intrinsic); one of its former portfolio managers, Mathew Martoma; and a doctor and medical consultant, Dr. Sidney Gilman, with allegedly participating in an insider trading ring in which CR Intrinsic, Martoma and funds managed by an unnamed affiliated hedge fund manager (identified in the financial press as SAC Capital) profited or avoided losses totaling $276 million – a record alleged value derived from an insider trading scheme, according to the U.S. Attorney’s Office.  According to the SEC’s complaint, CR Intrinsic traded ahead of a negative announcement of the results of a Phase II trial of a drug designed to treat Alzheimer’s disease that was being jointly developed by Elan Corporation, Plc and Wyeth.  Martoma allegedly received material nonpublic information through consultations with Gilman that were coordinated by an expert network firm.  Federal prosecutors in the Southern District of New York simultaneously unsealed a criminal complaint charging Martoma with insider trading.  This article summarizes the SEC’s complaint, including the allegations, claims and relief sought by the SEC.  (The factual allegations in the criminal complaint are substantially similar to those in the civil complaint.)

How Can Fund Managers Address the Regulatory, Compliance, Privacy and Ethics Issues Raised by Social Media?

On November 28, 2012 – a week from today – Richards Kibbe & Orbe LLP (RKO), Berkeley Research Group (BRG) and the Hedge Fund Law Report will host a complimentary, CLE-eligible webinar entitled “How can fund managers address the regulatory, compliance, privacy and ethics issues raised by social media?”  Topics to be covered in the webinar include: tapping into the benefits of social media for hedge fund advisory businesses while maintaining necessary control and oversight; navigating the complexities of user privacy, regulatory compliance and ethics; components of a model social media policy for fund managers; and implications of the Jumpstart Our Business Startups (JOBS) Act and rules for social media use.  The participants in the webinar will be: Eva Marie Carney, a partner in the Washington, D.C. office of RKO; James Walker, a partner in the New York office of RKO; Charles Lundelius, a director at BRG; and Karina Bjelland, a managing consultant in BRG’s Financial Institutions Practice.  Michael Pereira, publisher of the Hedge Fund Law Report, will moderate the discussion.  As a preview of the material to be discussed during the webinar, the Hedge Fund Law Report conducted a comprehensive interview with the four participants.  Our interview covered, among other topics: the definition of social media; ways in which hedge fund managers are using social media; authority governing the use by fund managers of social media; the chief ways in which the JOBS Act will impact the use by private fund managers of social media; whether the prohibition on public offerings in Sections 3(c)(1) and 3(c)(7) of the Investment Company Act will curtail the expanded solicitation and advertising rights granted by the JOBS Act; the tension between the CFTC’s “de minimis” exception from commodity pool operator registration requirements and the JOBS Act; steps to be taken by a private fund manager to ascertain the “accredited” status of investors sourced via social media; rules governing a fund manager’s recordkeeping obligations with respect to social media; best practices with respect to mobile devices; the interaction between federal and state privacy laws and monitoring and archiving of employee social media communications; insider trading concerns raised by social media; and social media activity that may fall within the ambit of the SEC’s rules on testimonials.  The full text of our interview with Carney, Walker, Lundelius and Bjelland is included in this issue of the Hedge Fund Law Report.

Ernst & Young’s Sixth Annual Global Hedge Fund Survey Highlights Continued Divergence of Expectations between Managers and Investors

On November 5, 2012, Ernst & Young released the results of its most recent annual global hedge fund survey, conducted in association with Greenwich Associates, in which one hundred of the world’s largest hedge fund managers and 50 major institutional investors representing $715 billion invested in hedge funds revealed their often differing views on topics of current interest to hedge fund industry participants.  Topics covered by the survey included the effectiveness of hedge fund regulation; the alignment of fund manager compensation with risk and performance; manager selection and redemption criteria; regulatory, capital, technology and hiring expenditures; fund of funds; and Eurozone considerations.  This article summarizes the key findings from the survey.  See also “Ernst & Young’s Arthur Tully Talks in Depth with Hedge Fund Law Report About Hedge Fund Governance, Succession Planning, Valuation, Form PF and Administrator Shadowing,” Hedge Fund Law Report, Vol. 5, No. 11 (Mar. 16, 2012).

Morgan Stanley Sues Former FrontPoint Partners Portfolio Manager Joseph F. “Chip” Skowron III for Losses Allegedly Caused by Skowron’s Insider Trading and Subsequent Cover-Up

In April 2011, Joseph F. “Chip” Skowron III, a former portfolio manager at hedge fund manager FrontPoint Partners, LLC (FrontPoint) pleaded guilty to criminal insider trading and obstruction of justice charges arising out of his trading in Human Genome Sciences, Inc. and his subsequent efforts to cover up that trading.  Morgan Stanley, which owned FrontPoint at the time of Skowron’s trading, paid $33 million to settle the SEC’s enforcement action against Skowron and FrontPoint’s funds.  Morgan Stanley has now commenced a civil suit against Skowron to recover that amount, along with the millions of dollars in compensation it paid Skowron and other substantial expenses and damages it claims it incurred as a result of Skowron’s admitted criminal conduct.  It asserts five separate causes of action against Skowron.  This article summarizes the allegations, claims and relief requested in Morgan Stanley’s complaint.  See also “Former Portfolio Manager of Hedge Fund Manager FrontPoint Partners, Joseph F. ‘Chip’ Skowron, Is Charged with Civil and Criminal Insider Trading Arising Out of Trading in Human Genome Sciences Stock,” Hedge Fund Law Report, Vol. 4, No. 13 (Apr. 21, 2011); and “SEC and DOJ Commence, Respectively, Civil and Criminal Insider Trading Actions Against a Doctor Who Allegedly Tipped Off a Hedge Fund Manager to Impending Negative Information About a Drug Trial,” Hedge Fund Law Report, Vol. 3, No. 44 (Nov. 12, 2010).

U.K. High Court of Justice Rules on Request by Hedge Fund Manager Affiliates to Search Computers of Two Former Employees

Most hedge fund management companies are built on a foundation of confidential and proprietary information – strategies, technologies, positions, plans, investor and prospect lists, etc.  To add value, employees must be given access to some or all of that confidential information, which of course invites the prospect that employees will walk away with it.  Managers take various steps to prevent theft of confidential information, including legal and technology precautions.  See “Protecting Hedge Fund Trade Secrets: What a Difference a Year Makes,” Hedge Fund Law Report, Vol. 5, No. 16 (Apr. 19, 2012).  However, confidential information can be hard to secure absolutely and difficult to monitor.  Thus, with some frequency, litigation over ownership of and access to confidential information follows the voluntary or involuntary departure of employees from hedge fund managers.  See “Eight Measures That Hedge Fund Managers Can Take to Mitigate the Risk of Theft of Their Trade Secrets,” Hedge Fund Law Report, Vol. 5, No. 21 (May 24, 2012).  This article discusses a recent example of such litigation.

Private Funds and Derivatives Lawyer Janet Murtha Joins Wuersch & Gering LLP

Wuersch & Gering LLP recently announced that Janet R. Murtha has joined the firm as a partner in its corporate department.  For Murtha’s insight on seeding transactions, see “Primary Legal and Business Considerations in Hedge Fund Seeding Arrangements,” Hedge Fund Law Report, Vol. 2, No. 38 (Sep. 24, 2009).

Justin Greenblum Joins Carter Ledyard & Milburn as Partner

Carter Ledyard & Milburn LLP has announced that Justin A. Greenblum has joined the firm as partner in its Litigation Department, effective November 9, 2012.  Greenblum’s practice concentrates on, among other things, general representation of private investment funds.