Jan. 9, 2014

Convertible Preferred Stock: How Preferred Is It? (Part Two of Two)

Convertible preferred stock investments provide important benefits for hedge funds and other investors including, among other things, a liquidation preference and the right to convert the investment into common stock of the company.  Nonetheless, an investor’s failure to rigorously negotiate a term sheet with respect to a convertible preferred stock investment before the specific charter provisions for the series are adopted can lead to inclusion of benefit-sabotaging terms that enable the company to leak value to the common stock while the convertible preferred remains outstanding; force conversion to occur sooner than the investor might like; and allow the preferred investor’s bargained-for terms to be amended away.  There are four principal areas of a company’s charter where the potential for value leakage, premature conversion or the loss of rights via amendment is most acute.  This is the second article in a two-part series identifying these risks and providing recommendations to assist investors in negotiating convertible preferred term sheets to fully capture the benefits of such investments.  The authors of this series are William Q. Orbe, founding partner of Richards Kibbe & Orbe LLP (RKO); Thao H.V. Do, a partner at RKO; and Catherine Rossouw, an associate at RKO.  See also “Convertible Preferred Stock: How Preferred Is It? (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 48 (Dec. 19, 2013).

Schulte Partner Stephanie Breslow Discusses Tools for Managing Hedge Fund Crises Caused by Liquidity Problems, Poor Performance or Regulatory Issues

The Practising Law Institute’s (PLI) Hedge Fund Management 2013 program included a session entitled “Managing Hedge Funds in Crisis,” which was presented by Stephanie R. Breslow, a partner at Schulte Roth & Zabel LLP, co-head of the firm’s Investment Management Group and a member of its Executive Committee.  Breslow discussed the various tools that managers have at their disposal to address crises impacting their funds, such as a run on liquidity, and how those tools have changed over time, particularly after the 2008 financial crisis.  This article summarizes the key takeaways from her presentation.  For a general discussion of post-crisis liquidity and crisis management tools, see “Structuring, Valuation, Fee Calculation and Other Legal and Accounting Considerations in Connection with Hedge Fund General Redemption Provisions, Lock-Up Periods, Side Pockets, Gates, Redemption Suspensions and Special Purpose Vehicles,” Hedge Fund Law Report, Vol. 3, No. 43 (Nov. 5, 2010); “What Are Hybrid Gates, and Should You Consider Them When Launching Your Next Hedge Fund?,” Hedge Fund Law Report, Vol. 4, No. 6 (Feb. 18, 2011); and “IOSCO Report Discusses Appropriate Use and Disclosure of Hedge Fund Redemption Suspensions, Gates and Side Pockets,” Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).

Citi Prime Finance Survey Reveals Levels and Mix of Expenses Incurred by Hedge Fund Managers of Different Sizes, Firm Profitability and Margins, Use of Chargebacks and Impact of Regulations on Expenses

Citi Prime Finance (Citi) recently released its 2013 Business Expense Benchmark Survey (Survey), which provides an overview of hedge fund management company expenses by firm size and region; shows how the components of management company costs change as firms grow; looks at headcount trends and profitability per employee; benchmarks current practices with respect to expense chargebacks to funds; and highlights industry perspectives on the costs and other burdens imposed by new regulations.  This year’s data set draws on, and augments, the data Citi used in preparing its 2012 business expense survey.  See “Citi Prime Finance Report Dissects the Expenses of Running a Hedge Fund Management Business, Identifying Components, Levels, Trends and Benchmarks,” Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).  This article summarizes the key findings from the Survey.

RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part Three of Three)

This is the third installment in our three-part series covering the RCA’s Compliance, Risk & Enforcement 2013 Symposium.  It summarizes key points from two sessions, one offering perspectives from regulators and industry participants on regulatory risks and compliance best practices relating to expert networks, valuation, custody and allocation of expenses; and another providing a detailed look into fund administrator shadowing.  The first installment covered highlights from two sessions, one addressing effective risk assessments for hedge fund managers and the other offering current and former government officials’ perspectives on expert networks, political intelligence, insider trading and valuation-related conflicts of interest.  The second installment summarized the most salient points from two sessions, including the keynote address by OCIE Director Andrew Bowden, and a session addressing fund distribution, the JOBS Act, broker registration, National Futures Association oversight of hedge fund marketing practices and the EU’s Alternative Investment Fund Managers Directive.

2013 Walkers Fundamentals Hedge Fund Seminar Highlights Trends in Cayman Fund Structures and Terms, Cayman and Irish Fund Governance Developments, Conflicts of Interest, Use of Advisory Boards and Fund Borrowing

On November 5, 2013, international law firm Walkers Global held its annual Walkers Fundamentals Hedge Fund Seminar in New York City.  At the seminar, Walkers partners offered insights on trends in structures and terms for new funds organized in Cayman; developments in Cayman and Irish fund governance; regulatory focus on conflicts of interest; the use of advisory boards; and trends in fund borrowing.  This article summarizes key points raised during the seminar.  For the HFLR’s coverage of Walkers Fundamentals Hedge Fund Seminars from prior years, see: 2012 Seminar; 2011 Seminar; and 2009 Seminar.

SEC’s Recent Settlement with a Hedge Fund Manager Highlights the Importance of Documented Internal Controls when Managing Conflicts of Interest Associated with Asset Valuation and Cross Trades

On November 19, 2013, the SEC issued an Order Instituting Administrative and Cease-and-Desist Proceedings (Order) against hedge fund manager and investment adviser Agamas Capital Management, LP (Agamas).  The SEC claimed that, during 2007 and 2008, Agamas failed to follow its own valuation policies in valuing mortgage-backed securities and other thinly-traded securities and failed to document properly its deviation from those policies.  See “DLA Piper Hedge Fund Valuation Webinar Covers Fair Value Methodologies, Valuation Services, Valuing Illiquid Positions and Handling Valuation Inquiries During SEC Examinations,” Hedge Fund Law Report, Vol. 6, No. 31 (Aug. 7, 2013); and “SEC Commissioner Aguilar Discusses Insider Trading by Hedge Fund Managers, Valuation and Other Examination and Enforcement Pressure Points,” Hedge Fund Law Report, Vol. 6, No. 18 (May 2, 2013).  The agency also charged that Agamas entered into cross trades with a separately managed account that it advised without having appropriate policies and procedures in place to manage the potential conflicts of interest that arose in connection with the cross trades.  Importantly, this action suggests the SEC’s heightened focus on circumstances where managers are authorized to exercise significant discretion in valuing securities.  This article summarizes the factual and legal allegations contained in the Order, as well as the remedies agreed to by Agamas.  The article also identifies important implications for hedge fund managers arising out of the settlement.  See also “SEC Charges Hedge Fund Manager with Impermissible Cross Trades, Inflating Valuation and Misleading Investors in a Scheme to Hide Fund Losses,” Hedge Fund Law Report, Vol. 5, No. 45 (Nov. 29, 2012).

Garret Filler Joins Blackfield Capital, LLC as General Counsel and Chief Compliance Officer

Global hedge fund management and financial services firm Blackfield Capital has hired Garret Filler as General Counsel and Chief Compliance Officer of its U.S. arm, Blackfield Capital, LLC, as of January 1, 2014.  Filler comes to Blackfield Capital after working at other top hedge fund managers, including Citadel, D. E. Shaw and Ellington Management Group.

Bingham Expands Securities, Commodities and Structured Transactions Capabilities in New York with Addition of Derivatives Partner

On January 6, 2014, Bingham McCutchen LLP announced the expansion of its finance, global funds and structured transactions practices with the addition of derivatives partner Daniel Budofsky to the Investment Management Practice Group in New York.  See “How Have Dodd-Frank and European Union Derivatives Trading Reforms Impacted Hedge Fund Managers That Trade Swaps?,” Hedge Fund Law Report, Vol. 6, No. 40 (Oct. 17, 2013); “Comparing and Contrasting EMIR and Dodd-Frank OTC Derivatives Reforms and Their Impact on Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 36 (Sep. 19, 2013).

Gardere Welcomes Investment Funds Attorneys George T. Lee III and Evan D. Stone

On January 8, 2014, Gardere Wynne Sewell LLP announced the addition of corporate partners George T. Lee III and Evan D. Stone to the firm’s Dallas office.  They join Gardere from the boutique firm the duo co-founded in 2009 (Lee & Stone LLP), where their practice focused on representing advisers to private investment funds, including hedge funds, private equity funds and venture capital funds, as well as public and private corporations.