Mar. 12, 2015

What Is the Value of Legal and Compliance Staff?  An Interview with David Claypoole on the Market for In-House Compensation at Hedge Fund Managers (Part One of Two)

Compensation of legal and compliance personnel at hedge fund managers is a complex and opaque topic.  In a recent interview with the Hedge Fund Law Report, David Claypoole, founder and President of Parks Legal Placement LLC, shared detailed insight into the overall market for and compensation of legal and compliance personnel, including general counsels (GCs), chief compliance officers (CCOs) and junior legal and compliance personnel.  In this article, the first in a two-part series, Claypoole discusses the factors that affect GC and CCO compensation; the current market standard compensation for legal and compliance personnel; how compensation of dual-hatted employees compares to compensation of single-role GCs and CCOs; trends in how GCs and CCOs are viewed by employers; compensation of junior legal and compliance personnel; when junior people reach their “legal bar mitzvah”; what makes an “exceptional” legal or compliance candidate; and how compensation of hedge fund GCs and CCOs compares to compensation of similar personnel at private equity and other types of managers.  In the second installment in the series, Claypoole will share his thoughts on the relationship between fund performance and compensation; trends in legal and compliance compensation, including with respect to junior compliance personnel; investments by legal and compliance personnel in the funds for which they work; and reporting lines for GCs and CCOs.  See also “How Much Are Hedge Fund Manager General Counsels and Chief Compliance Officers Paid?,” Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014); and “Annual Greenwich Associates and Johnson Associates Report Reveals Trends in Compensation of Investment Professionals at Buy-Side Firms,” Hedge Fund Law Report, Vol. 6, No. 48 (Dec. 19, 2013).  Claypoole will expand on the thoughts in this series at GAIMOps Cayman, to be held in the Cayman Islands from April 26-29, 2015.  For more information about GAIMOps Cayman, click here.

New Irish Fund Structure Offers Re-Domiciliation Possibilities and Tax Advantages for Hedge Funds

The Irish Parliament recently passed legislation to provide for a structure specifically tailored to meet the needs of the global funds industry.  The legislation creates a new form of corporate vehicle for funds, known as the Irish Collective Asset-Management Vehicle (ICAV).  In addition to minimizing the administrative complexity and cost of establishing and maintaining a collective investment scheme in Ireland, the ICAV will be an “eligible entity” for U.S. tax purposes, allowing it to “check the box.”  It is anticipated that the ICAV will make it increasingly attractive for fund promoters to establish new corporate funds in Ireland or, allied with the user-friendly Irish re-domiciliation mechanism, to re-domicile offshore funds to Ireland.  See “Redomiciling Offshore Investment Funds to Ireland, the European Gateway,” Hedge Fund Law Report, Vol. 4, No. 8 (Mar. 4, 2011).  The Central Bank of Ireland has recently confirmed that it stands ready and able to accept applications for ICAV structures within two weeks of the legislation being enacted.  In a guest article, Vincent Coyne, a Senior Associate in William Fry’s Asset Management and Investment Funds Department, first focuses on key tax considerations of the ICAV and the opportunities this creates for re-domiciling to Ireland, then examines the practical legal benefits of the new regime.

Citing Persistent Losses, Seed Investor BlueCrest Capital Sues Meredith Whitney and Her Hedge Fund for Return of Seed Capital

In exchange for committing capital to help launch a fund, companies that provide seed or founders’ capital are often granted special redemption rights and economic incentives such as reduced management and performance fees or a share of the fund manager’s fee income.  See “Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss Terms with Institutional Investors, Seeding Arrangements and the Convergence of Mutual Funds and Hedge Funds (Part Four of Four),” Hedge Fund Law Report, Vol. 8, No. 7 (Feb. 19, 2015).  Structuring such arrangements, however, can be challenging.  A recent dispute between seed investor BlueCrest Capital Opportunities Limited (BlueCrest) and Meredith Whitney’s hedge fund management company illustrates how the interplay of fund organizational documents, seeding agreements and side letters can cause confusion even among the most sophisticated players.  In 2013, BlueCrest seeded a new Whitney fund.  The fund performed poorly, and BlueCrest demanded redemption of its entire seed stake, citing a side letter that said that BlueCrest would not be subject to any lock-ups or other limitations on redemption.  Whitney pushed back, claiming that the separate investment agreement pursuant to which BlueCrest provided seed capital mandated a two-year lockup.  BlueCrest commenced an action in New York State Supreme Court to force Whitney to pay the demanded redemption proceeds and set aside the redemption proceeds pending the litigation.  This article summarizes the background of the dispute, the provisions of the relevant agreements, BlueCrest’s complaint, court hearings with respect to BlueCrest’s requests for a temporary restraining order and preliminary injunction, and the rationale for the court’s decision on the preliminary injunction motion.

Former Level Global Head David Ganek Sues U.S. Attorney Bharara and Other Senior DOJ and FBI Personnel, Claiming Fabrication of Evidence Against Him

Execution of a search warrant can be the kiss of death for a hedge fund manager, even if the search uncovers no wrongdoing.  Criminal and even regulatory investigations can result in a spate of redemption requests.  Within months after the FBI and U.S. Attorney executed a search warrant in November 2010 at the offices of hedge fund manager Level Global Investors, L.P. (Level), as part of their widely-publicized campaign against insider trading by hedge funds, Level shut its doors.  Anthony Chiasson, one of Level’s co-founders, was eventually convicted of insider trading; his conviction was recently reversed on appeal.  Although named personally in the warrant, Level co-founder David Ganek was never charged with a crime.  Ganek is now striking back.  In a civil complaint recently filed in the U.S. District Court for the Southern District of New York that names as defendants U.S. Attorney Preet Bharara and other high-level prosecutors and FBI officials, Ganek accuses certain U.S. prosecutors and FBI agents of fabricating the evidence that led to Ganek being named in the warrant.  This article summarizes Ganek’s complaint.  For a discussion of the alleged insider trading scheme that led to Level’s demise, 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).  For additional coverage of actions involving Level and its employees, see “The Newman-Chiasson Decision: Cold Comfort for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 47 (Dec. 18, 2014); 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).

Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit

The Asset Management Unit (AMU) of the SEC’s Enforcement Division views conflicts of interest as its “overarching concern.”  In a recent speech, Julie M. Riewe, Co-Chief of the AMU, discussed the AMU’s collaboration with other SEC divisions; detailed the AMU’s 2015 enforcement priorities with respect to registered investment companies, hedge funds, private equity funds and separately managed accounts; and discussed the AMU’s focus on conflicts – their ubiquity, the difficulty or impossibility of eliminating them, the limited extent to which disclosure can cure conflicts, the salience of conflicts when an investment adviser and broker-dealer are affiliated, and related considerations.  This article summarizes Riewe’s main points.  See also “SEC Investment Management Division Director Norm Champ Identifies the Top 10 Regulatory and Enforcement Lessons Learned during 2014,” Hedge Fund Law Report, Vol. 8, No. 4 (Jan. 29, 2015).

Structures and Characteristics of Activist Alternative Investment Funds

Simmons & Simmons and the Alternative Investment Management Association (AIMA) recently undertook joint research to assess the development and state of shareholder activism by alternative investors, investigate the impact of such activism and identify certain trends and implications for future developments.  This article summarizes the findings of that research with respect to the structure and characteristics of activist alternative investment funds.  See also “Practitioners Discuss U.S. and Canadian Shareholder Activism and Activist Tools,” Hedge Fund Law Report, Vol. 7, No. 45 (Dec. 4, 2014).  For a discussion of the fee and tax provisions of a publicly offered activist investment vehicle, see “Ackman’s Pershing Square Public Offering Features Novel Performance Fee Mechanism,” Hedge Fund Law Report, Vol. 7, No. 39 (Oct. 17, 2014).

Jay Gould Joins Winston & Strawn as Co-Chair of Financial Services and Investment Management Practice; Michael Wu Joins as Partner

On March 11, 2015, Winston & Strawn announced that Jay Gould and Michael Wu have joined the firm as partners in San Francisco.  Gould will co-chair Winston’s financial services and investment management practice.  Gould co-authored “Ten Steps to a Successful Form PF,” Hedge Fund Law Report, Vol. 5, No. 17 (Apr. 26, 2012).  For additional insight from Gould, see “What Do the SEC’s Recently Released FAQs on Supervisory Liability Mean for Legal and Compliance Personnel at Broker-Dealers and Hedge Fund Managers?,” Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013); “How Can Hedge Fund Managers Structure, Negotiate and Implement Expense Caps to Amplify Capital Raising Efforts?  (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013); and “How Much Are In-House Hedge Fund Marketers Paid, and How Will Recent Developments in New York City and California Lobbying Laws Impact the Compensation Levels and Structures of In-House Hedge Fund Marketers (Part Three of Three),” Hedge Fund Law Report, Vol. 4, No. 20 (Jun. 17, 2011).

Matthew R. Silver Joins Drinker Biddle & Reath’s Investment Management Practice Group

Drinker Biddle & Reath recently announced that Matthew R. Silver has joined the firm as counsel in the Investment Management Practice Group, based in Philadelphia.  For insight from the firm, see “The Odyssey of Private Fund Advertising: From Great Expectations to Much Ado about Nothing,” Hedge Fund Law Report, Vol. 7, No. 36 (Sep. 25, 2014); “Legal Considerations for Hedge Fund Managers that Use Social Media,” Hedge Fund Law Report, Vol. 4, No. 14 (Apr. 29, 2011); and “Applicability of New Disclosure Obligations under ERISA to Hedge Fund Managers,” Hedge Fund Law Report, Vol. 5, No. 9 (Mar. 1, 2012).