Dec. 18, 2014

Second Circuit Overturns Newman and Chiasson Convictions, Raising Government’s Burden of Proof in Tippee Liability Insider Trading Cases

The general principles of insider trading and tipper-tippee liability are fairly well-established.  It is clear that for an insider to be held liable for tipping material non-public information, the insider must breach a fiduciary duty to hold that information in confidence and must receive some personal benefit from the tip.  It is also clear that the recipient of the inside information – the tippee – must know that the tipper violated a fiduciary duty in providing that information.  What has been unclear is what the tippee needed to know, if anything, about the benefit to the tipper.  The U.S. Court of Appeals for the Second Circuit recently issued an important decision throwing out the convictions of Anthony Chiasson and Todd Newman, who were portfolio managers at Level Global Investors and Diamondback Capital Management, respectively.  The decision has direct and potentially profound implications for the research and investment activities of hedge fund managers.  This article provides a thorough discussion of the factual background and legal analysis in the decision.  For coverage of the civil enforcement actions relating to the alleged insider trading, see “SEC Files Civil Insider Trading Complaint Against Diamondback Capital Management, Level Global Investors and Seven Individuals Based on Trading in Dell and Nvidia; Diamondback Strikes Non-Prosecution Deal with U.S. Department of Justice and Settles with the SEC for $9 Million,” Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012); and “SEC’s Insider Trading Suit against Former Level Global Trader Illustrates the Risk of Retaining a Former Public Company Employee as a Consultant,” Hedge Fund Law Report, Vol. 6, No. 47 (Dec. 12, 2013).

The Newman-Chiasson Decision: Cold Comfort for Hedge Fund Managers

Last week, the Second Circuit issued its highly anticipated decision reversing the insider trading convictions of former Level Global Investors LP manager Anthony Chiasson and former Diamondback Capital Management LLC manager Todd Newman.  The decision sent a clear message to prosecutors – namely, that the prosecution of Newman and Chiasson was flawed and that its broad theories of culpability in insider trading cases needed to be significantly cut back.  But for hedge fund managers deciding how to conduct themselves in the world, what are the takeaways from the Newman-Chiasson decision?  In a guest article, Justin S. Weddle and Elnaz Zarrini, partner and associate, respectively, at Brown Rudnick, describe the key takeaways.

Regulators from the SEC, CFTC and New York Attorney General’s Office Reveal Top Hedge Fund Enforcement Priorities (Part Two of Four)

This is the second article in a four-part series covering this year’s edition of Practising Law Institute’s annual hedge fund enforcement event.  Participants at the event included regulators from the SEC, CFTC and New York Attorney General’s Office.  This article addresses CFTC enforcement concerns and cases, New York Attorney General’s Office initiatives and defense strategies for avoiding and managing government investigations.  The first article in this series discussed key points made by Julie M. Riewe, Co-Chief of the SEC’s Asset Management Unit, on enforcement trends, principal transactions, conflicts raised by side-by-side management, valuation, allocation of expenses and the potential deterrent value of smaller enforcement actions.  The third article in the series will focus on SEC inspections and examinations.  And the final article will provide instruction (based on points made at the PLI event) on how to establish an effective private fund compliance program.  See also “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part One of Three),” Hedge Fund Law Report, Vol. 7, No. 7 (Feb. 21, 2014).

What Hedge Fund Managers Need to Know About Year-End Tax Mitigating Strategies

Because hedge fund managers are almost invariably tasked with understanding and executing sophisticated investment strategies on behalf of investors, the assumption might be that they need less assistance in assessing personal income and other tax strategies.  However, experience does not bear this assumption out.  Managers are often so focused on fiduciary, operational and compliance responsibilities that their own family wealth strategy is comparatively neglected.  A robust family wealth strategy covers at least wealth creation, tax planning, asset protection, generational transfer and charitable initiatives; sustainable wealth creation is limited without the other components of a well-developed strategy.  Accordingly, in a guest article, Alan S. Kufeld, partner at Flynn Family Office, highlights some of the pillars of a well-developed strategy for hedge fund managers, focusing specifically on those most relevant to year-end tax planning.  In particular, Kufeld’s article discusses the minimum viable tax planning horizon; gifting of a “vertical slice” of fund interests; trust and estate structuring and planning; structuring around the 3.8% Medicare surtax; use of insurance structures to mitigate tax; the looming requirement to repatriate previously deferred compensation; charitable activities; and the role of family offices in perpetuating wealth generated from hedge fund activities.  See “Tax Efficient Hedge Fund Structuring in Anticipation of the New 3.8% Surtax on Net Investment Income and Proposals to Limit Individuals’ Tax Deductions,” Hedge Fund Law Report, Vol. 5, No. 40 (Oct. 18, 2012).

Former Employee Files Dodd-Frank Whistleblower Suit Against Vertical Capital

Miriam Freier was the marketing director of investment adviser Vertical Capital, LLC (Vertical).  Her employment was terminated in early December 2014.  She is suing Vertical and certain of its officers and/or principals under the whistleblower provisions of the Dodd-Frank Act, claiming that her employment was wrongfully terminated after she learned from a prospective investor of an ongoing SEC investigation of a Vertical affiliate and told the firm that she desired to cooperate with the SEC in that investigation.  For discussion of an SEC action against a private fund manager for retaliating against a whistleblower, see “Sanctions against Private Fund Manager for Retaliating against Whistleblower Highlight the Importance of Incentivizing Internal Reporting,” Hedge Fund Law Report, Vol. 7, No. 27 (Jul. 18, 2014).

SEC Chair White Describes the SEC’s Game Plan with Respect to the Asset Management Industry

In a speech at a December 11, 2014 event sponsored by The New York Times DealBook, SEC Chair Mary Jo White laid out her agency’s agenda concerning the asset management industry.  First, White summarized the recent growth of the asset management industry and the SEC’s current tools to address conflicts of interest, registration, reporting and disclosure.  Second, White focused on the SEC’s plan to improve its grasp of portfolio composition risks and operational risks by: requiring better data reporting and risk controls, particularly with respect to derivatives; mandating that investment advisers create transition plans to prepare for major business disruptions; and requiring large investment advisers and funds to submit to annual stress testing.  For additional recent insight on SEC regulatory and enforcement priorities, see “SEC Investment Management Division Director Norm Champ Details Disclosure Challenges Facing Hedge and Alternative Mutual Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 46 (Dec. 11, 2014).

Derek Meisner to Join RA Capital Management as General Counsel and Chief Compliance Officer

Derek Meisner will be leaving Regiment Capital at the end of the year to join RA Capital Management LLC, a Boston-based investment adviser with approximately $1 billion in assets under management, as its General Counsel and Chief Compliance Officer.

The HFLR Will Not Publish during Holiday Weeks and Will Resume Its Regular Publication Schedule during Week Starting January 5

Please note that the HFLR will not publish issues during the weeks of Christmas Day and New Year’s Day – both of which fall on the HFLR’s traditional Thursday publishing day – and will resume its normal weekly publication schedule during the week starting January 5, 2015.