Aug. 15, 2013

Structuring, Drafting and Enforcement Recommendations for Hedge Fund Managers Considering Employee Compensation Clawbacks (Part Two of Two)

Employee compensation clawbacks can help hedge fund managers deter bad acts, preserve reputation and demonstrate a commitment to compliance.  However, compensation clawbacks are only effective if properly structured, carefully drafted and consistently enforced.  This is the second article in a two-part series designed to help hedge fund managers think through the pros and cons of implementing compensation clawbacks.  In particular, this article starts by exploring some of the cons, including those relating to federal employment and tax law; state wage, labor and tax law; whistleblower issues; and logistical concerns.  This article then identifies four best practices for structuring and implementing clawbacks, and concludes with an appendix including three sample clawback provisions provided by sources and actually used by hedge fund managers, and one definition of “cause” used in connection with a clawback provision.  The first installment in this series provided an overview of employee clawbacks at hedge fund managers; discussed the types of employees, misconduct and triggering events covered by clawbacks; and highlighted the benefits of implementing clawbacks.  See “Structuring, Drafting and Enforcement Recommendations for Hedge Fund Managers Considering Employee Compensation Clawbacks (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 31 (Aug. 7, 2013).

How Can Hedge Fund Managers Apply the Law of Insider Trading to Address Hedge Fund Industry-Specific Insider Trading Risks? (Part Two of Two)

This is the second article in a two-part series detailing the application of abstract insider trading principles to specific scenarios and challenges faced by hedge fund managers.  This article discusses the misappropriation theory of insider trading; recent caselaw on the element of scienter; channel checking and field research; insider trading issues raised when fund investors are affiliated with portfolio companies; special insider trading rules that apply to tender offers; and criminal and civil penalties for insider trading.  The first article in this series discussed the definition of nonpublic information; the scope of the concept of materiality; the limits of the concept of fiduciary duty as it relates to insider trading; and the mosaic theory of insider trading.  See “How Can Hedge Fund Managers Apply the Law of Insider Trading to Address Hedge Fund Industry-Specific Insider Trading Risks? (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 31 (Aug. 7, 2013).  The author of this article series is Ralph Siciliano, head of the Governmental and Regulatory Investigations Practice at Tannenbaum Helpern Syracuse & Hirschtritt LLP.

Hedge Fund Manager Business Divorce Highlights Need to Properly Document Significant Money Transfers Between Principals

After several excellent years of firm performance, in late 2008, hedge funds managed by two hedge fund manager partners collapsed.  In January 2009, one partner made a gift of more than £3.8 million to a second partner.  The purpose of the gift was not clearly documented and, when the second partner later sued the first partner, the first partner sought to recover the gift from the second partner, claiming that he had made the gift on the mistaken assumption that the second partner was in serious financial trouble.  At trial, the U.K. High Court of Justice, Queen’s Bench Division, Commercial Court evaluated whether the gift was made on the basis of an excusable mistake.  This article summarizes the background of the dispute and the Court’s decision and reasoning.  For discussions of other actions involving disputes among hedge fund firm principals, see “New York Appellate Court Decision Illustrates the Litigation and Publicity Risk Inherent in Sloppy Drafting of Hedge Fund Manager Operating Agreements,” Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013); “U.K. High Court of Justice Rules on Whether Software Written by Co-Founder of a Hedge Fund Manager Belongs to the Co-Founder or the Firm,” Hedge Fund Law Report, Vol. 6, No. 22 (May 30, 2013).

First Circuit Holds that Private Equity Fund May Be Liable for Unfunded Pension Obligations of Portfolio Company

Private equity funds often exercise significant management control over, and effect changes to management and operations of, portfolio companies.  On July 24, 2013, the U.S. Court of Appeals for the First Circuit ruled that, as a result of those “hands on” activities, a private equity fund may constitute a “trade or business” within the meaning of the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendment Act of 1980.  As such, a private equity fund could potentially face liability for the unfunded pension obligations of a portfolio company.

Implications for Private Fund Managers of the SEC’s Recent Custody Rule Guidance and Relief Relating to “Privately Offered Securities”

On August 1, 2013, the SEC’s Division of Investment Management issued a Guidance Update relating to Rule 206(4)-2 under the Investment Advisers Act of 1940 indicating that it would not object if certain non-transferrable stock certificates and certain other instruments evidencing privately placed securities were not maintained with a qualified custodian by advisers to pooled investment vehicles.  Among other things, the relief could result in lower costs having to be incurred by private funds and investors to custody such privately placed securities.  This article describes the SEC’s guidance, the conditions for the relief granted and the implications for private fund managers.  For a discussion of the SEC’s heightened focus on custody issues, as highlighted in deficiencies uncovered during recent presence examinations, see “Recently Published SEC Risk Alert Reveals Significant Deficiencies in Custody Practices of Hedge Fund Managers and Other Investment Advisers,” Hedge Fund Law Report, Vol. 6, No. 10 (Mar. 7, 2013).  See also “How Does the SEC Approach Custody Issues in the Course of Examinations of Hedge Fund Managers?, Hedge Fund Law Report, Vol. 5, No. 18 (May 3, 2012).

Second Circuit Evaluates Whether Hedge Fund Employee Who Pled Guilty to Insider Trading Is Responsible for Reimbursing Morgan Stanley for Compensation and Legal Expenses

The Second Circuit Court of Appeals (Court) recently considered a decision by the U.S. District Court for the Southern District of New York holding that Joseph “Chip” Skowron is responsible for reimbursing his former employer $10 million in compensation and legal expenses incurred in defending Skowron as a result of the SEC’s investigation into his insider trading.  Among other things, the Court evaluated to what extent the Mandatory Victims Restitution Act is available to employers that wish to claw back compensation from their employees for illegal conduct.  See “Structuring, Drafting and Enforcement Recommendations for Hedge Fund Managers Considering Employee Compensation Clawbacks (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 31 (Aug. 7, 2013).  This article outlines the factual and procedural background in this case as well as the legal analysis underpinning the Court’s decision.

Former Asset Management Unit Assistant Director Scott Weisman Joins PwC’s Financial Services Regulatory Practice

Scott Weisman, former Assistant Director of the Asset Management Unit of the SEC’s Division of Enforcement, has joined PwC’s Financial Services Regulatory practice as a Managing Director based out of its Washington, D.C. office.  For insight from that practice, see “Former OCIE Chief Lori Richards and other PwC Partners and Managers Discuss the Mechanics of the AIFMD and Its Impact on Marketing by U.S. Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 10 (Mar. 7, 2013).

Tom Devaney Joins Sheppard Mullin in New York

On August 12, 2013, Sheppard, Mullin, Richter & Hampton LLP announced that Thomas M. Devaney has joined as a partner in the firm’s Corporate practice group, based in the firm’s New York office.  Devaney joins from Morrison & Foerster, where he was a partner and led that firm’s private funds practice in New York for more than seven years.

Former Director of SEC Division of Investment Management Joins CamberView Partners

On August 13, 2013, CamberView Partners, LLC announced that Eileen Rominger, former Director of the Division of Investment Management at the SEC and former Global Chief Investment Officer of Goldman Sachs Asset Management, has joined the firm as a Senior Advisor.  For insight from Rominger, see “SEC Provides Recommendations for Establishing an Effective Risk Management Program for Hedge Fund Managers at Its Compliance Outreach Program National Seminar,” Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012).