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    Mar. 21, 2014

Key Structuring and Negotiating Points in Secondary Sales of Private Fund Interests

Each year, billions of dollars are invested in the private equity and private real estate markets; in 2013 alone, $454 billion of new equity was reportedly raised globally.  All of these investments are not only private, but also highly illiquid.  Unlike their hedge fund counterparts, private equity funds typically do not allow investors an early out should their investment circumstances change.  To provide some measure of liquidity to an otherwise illiquid asset class, an active secondary market has arisen in the private marketplace.  There are several reasons why a secondary market transaction might be attractive to a seller.  Given the illiquid nature of these interests, however, each sale must be privately negotiated, raising legal and deal issues for both seller and buyer.  In a guest article, Tyler Hilton and Gary J. Cohen, associate and partner, respectively, at Sidley Austin LLP, offer a comprehensive catalogue of these issues, and discuss best practices for handling them.

New York City Bar’s “Hedge Funds in the Current Environment” Event Focuses on Hedge Fund Structuring, Private Fund Examinations, Compliance Risks and Seeding Arrangements

On March 5, 2014, the New York City Bar held the most recent edition of its annual “Hedge Funds in the Current Environment” event.  Panelists at the event – including general counsels and chief compliance officers (CCOs) from leading hedge fund managers and partners from top law firms – addressed hedge fund structuring considerations (including the purposes and mechanics of mini-master funds); the myth of the unregulated hedge fund; analogies between regulatory examinations and investor due diligence; seven key areas of regulatory interest in hedge fund examinations; five headline issues confronting CCOs; four pros and seven cons of hedge fund seeding arrangements; and a structuring alternative to seeding ventures.  This article highlights the salient points from the event.  For our coverage of the 2012 edition of this event, see “Davis Polk ‘Hedge Funds in the Current Environment’ Event Focuses on Establishing Registered Alternative Funds, Hedge Fund Manager M&A and SEC Examination Priorities,” Hedge Fund Law Report, Vol. 5, No. 24 (Jun. 14, 2012).

Puffery or Securities Fraud?  Litvak Conviction Sheds Light on Permissible Bounds of Bond Sales Talk and the Evidentiary Power of Bloomberg Chats

On March 7, 2014, a senior Jefferies & Co., Inc. (Jefferies) employee, Jesse C. Litvak, was convicted by a Connecticut jury of 15 counts of federal securities fraud and other violations arising out of the sales tactics he used in selling bonds.  Litvak was a licensed broker who was employed as a senior trader and managing director at Jefferies.  He specialized in trading residential mortgage-backed security (RMBS) bonds.  He sold RMBS bonds to customers that included U.S. government-sponsored Public-Private Investment Funds, which were established in 2009 and 2010 under the Troubled Asset Relief Program.  A March 12, 2014 panel discussion organized by the law firm Richards Kibbe & Orbe LLP (RKO) addressed the fraud allegations, the legal arguments adduced by the prosecution and defense and the lessons from Litvak’s conviction.  The panel featured RKO partners Lee Richards III, Daniel Stein and David Massey, all former Assistant U.S. Attorneys, and Michael Mann, a former SEC Director of the Office of International Affairs.  This article summarizes the main points from the discussion, which should inform interactions between hedge fund managers that trade fixed income securities and their brokers.  For additional insight from RKO partners, see “Succession Planning Series: Selling a Hedge Fund Founder’s Interest to an Outside Investor (Part Two of Two),” Hedge Fund Law Report, Vol. 7, No. 2 (Jan. 16, 2014); “Convertible Preferred Stock: How Preferred Is It? (Part Two of Two),” Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014); and “An Examination of Exit Rights for Hedge Funds Making Non-Controlling Private Equity Investments,” Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).

Second Circuit Appeal May Alter the Regulatory Landscape for Hedge Funds and Other Investors in Residential Mortgage-Backed Securities

In an appeal highlighting conflicting federal district court decisions from the Southern District of New York, the United States Court of Appeals for the Second Circuit will have to determine whether the Trust Indenture Act of 1939 (TIA) – which commentator Thomas Hazen has called the “forgotten” securities statute – applies to the scores of securitization deals that are governed by pooling and servicing agreements.  If the panel finds that it does, then the opportunities and challenges for securitization trustees and investors may alter the structured finance landscape significantly.  If the Court of Appeals finds that it does not, then the status quo in the securitization market will be preserved, albeit with rather shaky analytical underpinnings.  In a guest article, Edmund M. O’Toole, a litigation partner with Venable LLP and head of the firm’s New York office, provides a brief background on the TIA, a summary of the conflicting district court opinions and the significant market and policy issues that are implicated in this appeal.

Quant Fund Manager Moves Aggressively Against Former Employee Who Allegedly Stole Trade Secrets and Other Proprietary Information

Private fund managers have become highly attuned to the risks posed by theft of proprietary information and have been aggressive in seeking recourse against former employees who have attempted to misappropriate such information.  See “Proprietary Trading Firm Sues Former Chief Operating Officer for Allegedly Misappropriating Confidential Information to Benefit His New Hedge Fund Manager Employer,” Hedge Fund Law Report, Vol. 6, No. 42 (Nov. 1, 2013).  Federal and state authorities have, in many cases, added criminal charges to the civil efforts of managers.  See “Recent Developments Affecting the Protection of Trade Secrets by Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013).  A recently-filed action by a quantitative hedge fund manager against a former employee illustrates the difficulty of preventing theft of trade secrets – despite sophisticated legal and technological efforts – as well as the claims and remedies available to private fund managers and prosecutors in such circumstances.

Former Asset Management Unit Official Matthew Rossi Joins Mayer Brown’s Securities Litigation & Enforcement Group in D.C.

On March 18, 2014, Mayer Brown announced that Matthew Rossi has joined the firm in Washington, D.C. as a partner in its Securities Litigation & Enforcement group.  Rossi joins from the SEC’s Enforcement Division, where he served as Assistant Chief Litigation Counsel.  While at the SEC, Rossi worked primarily with the Enforcement Division’s Asset Management Unit (AMU), a specialized unit within the Enforcement Division that investigates misconduct by investment advisers, private funds and registered investment companies.  For practical advice from AMU officials, see “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Three of Three),” Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014); “PLI Panel Provides Regulator and Industry Perspectives on Ethical and Compliance Challenges Associated with Hedge Fund Investor Relations,” Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013).

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