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    Apr. 4, 2014

How Can Hedge Fund Managers Reconcile Effective Monitoring of Electronic Communications with Employees’ Privacy Rights? (Part One of Three)

Information is the raw material out of which hedge fund managers fashion their finished products – compelling investment ideas and, one hopes, absolute returns.  As such, managers and their personnel are continuously engaged in collecting, refining and transmitting information, that is, communicating.  Today, the vast majority of such communications occur electronically – via e-mail, chat, text, social media and similar channels.  From an investment perspective, this increases opportunities but at the same time competition.  From a compliance perspective, the proliferation of electronic communications has dramatically expanded the range of opportunities for legal and regulatory violations.  Hedge fund managers are not unique among businesses in contending with the compliance challenges raised by electronic communications, but many of the specific compliance challenges faced by hedge fund managers are industry-specific.  Accordingly, the Hedge Fund Law Report is undertaking a three-part series intended to identify the specific compliance challenges for hedge fund managers raised by electronic communications and to outline best practices for surmounting those challenges.  This article – the first in the series – catalogues six reasons why hedge fund managers need to monitor electronic communications of employees and highlights two settings in which procedures other than electronic communication monitoring are most effective.  Subsequent articles in the series will discuss the sources of employees’ privacy rights, factors bearing on the reasonableness of an employee’s expectation of privacy, the benefits and limits of specific policies regarding electronic communication monitoring and best practices in this area.  See also “Key Elements of Electronic Communications Policies and Procedures for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 3, No. 44 (Nov. 12, 2010).

Seward & Kissel Partner Steven Nadel Identifies 29 Top-of-Mind Issues for Investors Conducting Due Diligence on Hedge Fund Managers

On March 25 and 26, 2014 at the Princeton Club in New York, Financial Research Associates held the most recent edition of its annual Hedge Fund Due Diligence Master Class.  During an opening “fireside chat,” Seward & Kissel LLP partner Steven Nadel identified 29 areas of concern for investors engaged in due diligence of hedge fund managers.  Many of these concerns overlap with concerns of regulators examining hedge fund managers.  This article lists the issues identified by Nadel and relays his market color on each.

Dan Darchuck of Topturn Capital Discusses the Mechanics and Consequences of Video Advertising by Hedge Fund Managers

The JOBS Act has so far occasioned a modest quantity of advertisements by hedge funds, rather than the deluge some expected.  Most managers have decided to hold off on advertising altogether, to use the liberalized advertising rights indirectly (e.g., via wider-ranging public comments) or to take a “wait-and-see” approach.  For managers in the last class, the experience of Topturn Capital is instructive.  Last December, Topturn was among the first hedge fund managers to publicly release a video that, while not an “advertisement” in the traditional retail sense, may well have run afoul of the pre-JOBS Act ban on general solicitation.  Released into the post-JOBS Act world, however, the video has garnered significant attention without violating any law or rule.  The video has had unintended positive consequences – notably, utility in recruiting talent – while the downside has thus far been muted.  The Hedge Fund Law Report recently interviewed Dan Darchuck, Co-Founder and CEO of Topturn, in an effort to understand Topturn’s hedge fund advertising experience at a granular level.  Our interview covered, among other things, Topturn’s rationale for creating the video; the video’s content, distribution and intended audience; its impact on AUM and investor relations; the response from regulators; how Topturn approached the legal disclaimer in the video; the relevance of AUM levels in determining whether to advertise by video; and the cost and other mechanics of creating the video.  See also “Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds,” Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).

Anatomy of a Blank Check IPO by a Hedge Fund Manager

Marc Lasry and Sonia E. Gardner, founders of private fund manager Avenue Capital Management (Avenue), are seeking to raise $175 million of new capital through a “blank check” initial public offering.  They have formed a new entity, Boulevard Acquisition Sponsor, LLC (Sponsor), to serve as sponsor of the offering.  The shares will be offered by Boulevard Acquisition Corp. (BAC), a corporation whose initial shareholders are Sponsor and three proposed independent directors of BAC.  Avenue portfolio manager Stephen S. Trevor is BAC’s President and CEO.  BAC’s recently-filed amended Registration Statement on Form S-1 provides a helpful example of the workings of a blank check offering by an established manager.  As is the case with all public offerings, SEC rules require the registration statement for a blank check IPO to contain a great deal of information about the offering and its sponsors.  This article focuses on the logistics and unique characteristics of a blank check IPO, the economic terms of the offering and risks facing potential investors.  Hedge fund managers have used or attempted to use public offerings for a number of business purposes, including to monetize the value of a hedge fund management business (see “Mechanics of a Hedge Fund Manager IPO,” Hedge Fund Law Report, Vol. 5, No. 16 (Apr. 19, 2012)), and to raise funds to acquire mortgage backed securities (see “Prospectus for Suspended Ellington Financial IPO Details Mechanics of a Hedge Fund Permanent Capital Vehicle,” Hedge Fund Law Report, Vol. 2, No. 50 (Dec. 17, 2009)).

Harbinger Group Faces Derivative Class Action Lawsuit Stemming from Alleged Fund-Raising Machinations by Philip Falcone

Haverhill Retirement System (Haverhill) has commenced a shareholder class action and derivative lawsuit against the directors and controlling shareholders of Harbinger Group Inc. (HGI), a publicly-traded Delaware holding company once controlled by hedge funds managed by defendant Philip A. Falcone.  Haverhill claims that Falcone, facing a liquidity crunch in his hedge funds, arranged to sell a portion of his funds’ HGI shares to defendant Leucadia National Corporation (Leucadia).  In doing so, Haverhill charges that Falcone and the other named defendants had conflicts of interest and engaged in breaches of fiduciary duty, corporate waste and other misconduct when they granted seats on HGI’s board and registration rights for HGI shares to Leucadia in a deal that benefited Falcone and Leucadia, but not HGI.  See also “Important Implications and Recommendations for Hedge Fund Managers in the Aftermath of the SEC’s Settlement with Philip A. Falcone and Harbinger Entities,” Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).

Investcorp Appoints Jonathan Joyce Head of Operational Risk for Hedge Funds Group

On April 2, 2014, Investcorp’s New York-based Hedge Funds Group announced that Jonathan Joyce has joined the firm as Head of Operational Risk for the Hedge Funds Group.  See “Legal and Operational Due Diligence Best Practices for Hedge Fund Investors,” Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012); “Top Ten Operational Risks Facing Hedge Fund Managers and What to Do about Them (Part Three of Three),” Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).

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