This is the second article in a two-part series on how a hedge fund investor can maximize the protection of its investment in a fund at three distinct stages towards and at the end of its commercial life.  This article addresses measures available to investors during the third stage: when the fund is placed into formal liquidation, either by a court or by voluntary winding up.  The first installment addressed measures available to investors during the first two stages: where there are warning signs that the fund may be heading into financial difficulty or when the fund is placed into management wind down.  See “How Can Investors in Cayman Hedge Funds Maximize Protection of Their Investments When the Fund Is Near or At the End of Its Life? (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 46 (Dec. 5, 2013).  The authors of this series are Christopher Russell, Jonathan Bernstein and Jeremy Snead.  Russell and Snead are, respectively, a partner and an associate in the litigation department of Appleby Cayman; Bernstein is a senior associate in the corporate and investment funds department. Read full article …

For a hedge fund manager to stand out in a crowded capital raising environment, its marketing must be lucid, coherent, consistent, credible and compelling.  The core purpose of hedge fund marketing is to convey the manager’s sustainable competitive advantage, and in doing so, managers typically find case studies persuasive.  If properly structured, case studies can demonstrate how a manager achieved reported results rather than merely communicating what those results were.  That is, a good case study can help substantiate a manager’s claim to competitive advantage, while at the same time illustrating the sustainability of the advantage.  However, the use of case studies by hedge fund managers in marketing is constrained by law and regulation, some of it counterintuitive to a logical portfolio manager.  For example, if a marketing presentation describes a successful investment with 100% accuracy, that presentation may nonetheless be materially misleading under the federal securities laws.  In short, case studies have obvious business value, but sometimes non-obvious legal risk.  This article is the second in a series seeking to untangle that risk for hedge fund managers that wish to capture the upside of case studies in marketing.  This article continues the discussion of risks associated with use of case studies (initiated in the first article in this series), and provides five best practices for managers wishing to use case studies in marketing.  The first article in the series described the purposes and typical contents of case studies; identified the types of managers and strategies that use and benefit from case studies; and began the discussion of risks associated with use of case studies in marketing, including an analysis of the cherry picking rule.  See “How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule? (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 46 (Dec. 5, 2013). Read full article …

The Regulatory Compliance Association recently held its Compliance, Risk & Enforcement 2013 Symposium (Symposium), at which regulators and hedge fund industry experts offered insights on relevant regulatory, compliance and operational topics.  This first installment of a three-part series covering the Symposium summarizes two sessions, one on conducting effective risk assessments for hedge fund managers (including discussions of forensic testing and testing for insider trading, order allocations and best execution), and the other incorporating current and former government officials’ perspectives on expert networks, political intelligence, insider trading investigations and prosecutions and valuation-related conflicts of interest.  The second installment will summarize salient points from the keynote address by Andrew Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations, and a session addressing challenges for fund distribution raised by the JOBS Act, broker registration issues and the AIFMD.  The third installment will summarize key points from two sessions, one on compliance best practices for use of expert networks, valuation, custody and expense allocation, and another on fund administrator shadowing. Read full article …

On December 4, 2013, the staff of the Division of Corporate Finance of the SEC published “Compliance and Disclosure Interpretations” (interpretative guidance) addressing the applicability of the recently-adopted “bad actor” disqualification provisions (Rules 506(d) and (506(e)) recently adopted by the SEC as part of its JOBS Act rulemaking.  See “SEC JOBS Act Rulemaking Creates Opportunities and Potential Burdens for Hedge Funds Contemplating General Solicitation and Advertising,” Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).  The interpretative guidance addressed, among other things, the scope of covered persons and disqualifying events covered by the rules, acceptable due diligence measures that issuers can employ to avoid disqualification, guidance with respect to an issuer’s dealings with compensated solicitors to avoid disqualification, circumstances in which issuers need not and cannot seek waivers from application of Rule 506(d) and the scope of an issuer’s Rule 506(e) disclosure obligations.  The interpretations have numerous implications for hedge funds that seek to offer securities in reliance on Rule 506.  This article summarizes key takeaways from the interpretative guidance and outlines important implications for hedge fund issuers arising out of the guidance.  For additional insight on interpretation of the bad actor disqualification provisions, see “How Can Hedge Fund Managers Negotiate the Structuring, Operational and Due Diligence Challenges Posed by the Bad Actor Disqualification Provisions of Rule 506(d)?,” Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013). Read full article …

This is the third article in our three-part series covering the 7th Annual Hedge Fund General Counsel Summit hosted by ALM Events.  This article addresses salient points from sessions on the JOBS Act, the Alternative Investment Fund Managers Directive and new regulatory developments that will impact activist investing in Canada.  The first installment discussed strategies for handling government investigations and challenges facing chief compliance officers, including dual-hatting and supervisory liability.  The second installment discussed the impact of over-the-counter derivatives reforms on fund managers (including a discussion of new mandatory trade reporting, clearing and execution requirements as well as CFTC cross border rules); opportunities and challenges associated with distressed debt investing (including a discussion of opportunities to participate in Chapter 11 proceedings, considerations in claims trading and risks of distressed debt investing); and best practices to address insider trading risks.  On insider trading, see also “Akin Gump Partners Discuss Non-U.S. Enforcement, Insider Trading in Futures, Failure to Supervise Charges and Other Evolving Insider Trading Challenges for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 45 (Nov. 21, 2013). Read full article …

Earlier this year, the U.S. Tax Court issued a decision that provided insight on when a person engaged in trading securities would be deemed a “trader” as opposed to an “investor.”  The distinction is important in the hedge fund space: Investors in “trader funds” are able to deduct a greater portion of the fund’s expenses on their personal income tax returns.  Generally, expenses passed through to investors from an “investor fund” are capped at two percent of the investor’s adjusted gross income, while expenses passed through by a “trader fund” are fully deductible against hedge fund income by investors.  See “What Critical Issues Must Hedge Fund Managers Understand to Inform Their Preparation of Schedules K-1 for Distribution to Their Investors?,” Hedge Fund Law Report, Vol. 6, No. 11 (Mar. 14, 2013).  This article summarizes the factual background of the case, including a discussion of the taxpayer’s trading activities, the Court’s legal analysis and its decision.  See also “U.S. Tax Court Decision Considering ‘Investor’ vs. ‘Trader’ Status Could Impact the Tax Status of Hedge Funds and the Deductibility of Fund Expenses by Hedge Fund Investors,” Hedge Fund Law Report, Vol. 6, No. 40 (Oct. 17, 2013). Read full article …

On November 14, 2013, the SEC commenced a civil enforcement action against Mark Megalli, a trader at now-defunct hedge fund manager Level Global Investors, L.P., in the U.S. District Court for the Northern District of Georgia.  This article summarizes the factual and legal allegations leveled by the SEC against Megalli and describes some key implications for hedge fund managers, including risks associated with gathering information from former employees of public companies and all third-party consultants (including but not limited to consultants retained via expert networks).  See “Former Rajaratnam Prosecutor Reed Brodsky Discusses the Application of Insider Trading Doctrine to Hedge Fund Research and Trading Practices,” Hedge Fund Law Report, Vol. 6, No. 13 (Mar. 28, 2013).  This article also provides several best practices for mitigating insider trading-related risks arising out of the retention and use of such research providers.  See “Best Practices for Due Diligence by Hedge Fund Managers on Research Providers,” Hedge Fund Law Report, Vol. 6, No. 11 (Mar. 14, 2013).  In many respects, the challenges associated with using these stand-alone third-party consultants are greater than those associated with the use of compliance-minded expert networks that have developed robust insider trading compliance infrastructures. Read full article …

On December 10, 2013, Katten Muchin Rosenman LLP announced that private fund and investment management attorney Anthony L. Perricone will join the firm’s Financial Services practice as a partner based in New York.  For recent insight from Katten, see “Katten Seminar Provides Hedge Fund Managers with a Roadmap for JOBS Act Compliance,” Hedge Fund Law Report, Vol. 6, No. 43 (Nov. 8, 2013).  Perricone’s arrival at Katten is the second major addition to the firm’s investment funds practice in the past two months, following the hiring of hedge and private equity fund specialist Barry Breen in the London office. Read full article …

On December 12, 2013, Richards Kibbe & Orbe LLP announced that David B. Massey, former Assistant U.S. Attorney for the Southern District of New York, has joined the firm’s New York office as a partner.  For insight from RK&O partners, see “Succession Planning Series: A Blueprint for Hedge Fund Founders Seeking to Pass Along the Firm to the Next Generation of Leaders (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 45 (Nov. 21, 2013). Read full article …

On December 11, 2013, Ropes & Gray announced that Brenda Coleman has joined the firm as a partner in its tax & benefits department.  For recent coverage of Ropes & Gray materials in the HFLR, see “SEC’s First Deferred Prosecution Agreement with an Individual Underscores Its Commitment to Eliciting Cooperation in Cases Against Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 46 (Dec. 5, 2013); “Tax and Structuring Considerations for Funds Organized to Invest in Master Limited Partnerships,” Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013); and “Ropes & Gray Partners Share Insights Gleaned from Successfully Navigating Presence Examinations with Hedge Fund Manager Clients,” Hedge Fund Law Report, Vol. 6, No. 10 (Mar. 7, 2013). Read full article …