• |

    Oct. 29, 2015

Supreme Court’s Denial of Cert in Newman Favors Insider Trading Defense (Part One of Two)

Based on the Supreme Court’s October 5, 2015, denial of certiorari, the Second Circuit’s ruling in U.S. v. Newman – a decision widely considered to make insider trading convictions more difficult for the government to prove – remains intact.  Against a host of successful insider trading prosecutions by the Department of Justice, the Second Circuit’s decision in Newman was a sudden, and perhaps unexpected, development that severely limited the government’s ability to pursue insider trading charges in many instances.  In a guest article, the first in a two-part series, Dechert partners Robert J. Jossen and Michael J. Gilbert analyze the Newman decision and the government’s unsuccessful certiorari petition.  In the second article in the series, the authors will discuss a recent Ninth Circuit decision the government asserts conflicts with Newman and assess the problems that lie ahead for insider trading investigations and prosecutions in a post-Newman world. For insight from Jossen, see “For Hedge Fund Managers in a Heightened Enforcement Environment, Internal Investigations Can Help Prevent or Mitigate Criminal and Civil Charges,” Hedge Fund Law Report, Vol. 2, No. 47 (Nov. 25, 2009).   For more from Gilbert, see “Dechert Partners and Venor Capital General Counsel Describe the Scope of Supervisory Liability for Hedge Fund Manager Personnel,” Hedge Fund Law Report, Vol. 7, No. 26 (Jul. 11, 2014).  The Hedge Fund Law Report and Dechert will be co-sponsoring a panel on fundraising and marketing in Europe, focusing on the role of the general counsel and chief compliance officer, to be held in London on November 17, 2015.  For more information contact rsvp@hflawreport.com.

European Hedge Fund Managers Must Incorporate New Guidelines on Risk Factors into Due Diligence Processes

The E.U. Directive to prevent money laundering and terrorist financing via the financial system (AML Directive) became effective on June 26, 2015.  It seeks to bring Europe into alignment with the 2012 International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (Standards).  Following the Standards, the AML Directive puts the onus on Member States, competent authorities and in-scope firms – including hedge fund and other investment managers – to assess and manage anti-money laundering risks and implement appropriate counter-terrorist financing measures.  Consequently, European hedge fund managers will be required to determine the extent of their customer due diligence (CDD) measures on a risk-sensitive basis, applying simplified CDD for low-risk relationships but enhanced CDD for higher-risk relationships.  To help firms identify, assess and manage money laundering and terrorist financing risk – as well as help national competent authorities measure the adequacy of such firms’ actions – the European Supervisory Authorities jointly issued draft risk factor Guidelines for risk assessments, outlining how firms may adjust their CDD commensurate with identified risks.  This article summarizes those sections of the Guidelines applicable to hedge fund managers; outlines the impact of the Guidelines on hedge fund managers; and sets out the timeframe for implementation and compliance.  For more on anti-money laundering, see “Do Hedge Funds Really Pose a Money Laundering Threat? A Decade of Regulatory False Starts Raises Questions,” Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012); and “FinCEN Working on a Proposed Rule That Would Require Investment Advisers to Establish Anti-Money Laundering Programs and Report Suspicious Activity,” Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).

Explicit Disclosure of Changes in Hedge Fund Investment Strategy to Investors and Regulators Is Vital to Reduce Risk of Enforcement Action

Federal securities laws are largely disclosure-based; absent any misconduct, a fund adviser that appropriately discloses and follows its investment strategy will not generally be liable to investors for losses sustained by the fund.  However, as evidenced by a recent SEC enforcement action, broad disclosures about permissible investments will not shield a manager that departs wholesale from a fund’s stated investment strategy.  The SEC recently settled charges that an investment adviser violated numerous antifraud and other provisions of the federal securities laws when it abruptly changed from its stated long distressed debt strategy to a net short position without appropriate disclosures.  This article summarizes the facts underlying the proceeding, the SEC’s specific charges and the sanctions imposed on the respondents.  For another recent enforcement action involving style drift, see “Appropriately Crafted Disclosure of Conflicts of Interest Can Mitigate the Likelihood of an Enforcement Action Against an Investment Adviser,” Hedge Fund Law Report, Vol. 8, No. 40 (Oct. 15, 2015).  See also “To What Extent Is a Hedge Fund Bound, Legally and Practically, by Its Strategy as Stated in Its Governing Documents and at Marketing Meetings?,” Hedge Fund Law Report, Vol. 2, No. 49 (Dec. 10, 2009).

SEC Chair Highlights Two Types of Risks Hedge Fund Managers Must Consider

The SEC regards required registration and reporting under the Dodd-Frank Act as critical for increasing transparency and protecting investors in hedge funds and other private funds.  However, as SEC Chair Mary Jo White recently noted at the Managed Funds Association Outlook 2015 Conference held in New York, the SEC is entering “a new phase of oversight.”  In her remarks, White discussed what the SEC has learned – and will continue to focus on – regarding the risk profiles of private funds.  White also enumerated risks and challenges for private funds and their advisers that can have a systemic impact, as well as firm-specific risks that hedge fund managers and other advisers should actively consider in their businesses.  This article summarizes White’s remarks.  For additional insight from White, see “SEC Chair White Describes the SEC’s Game Plan with Respect to the Asset Management Industry,” Hedge Fund Law Report, Vol. 7, No. 47 (Dec. 18, 2014); “Seven Cybersecurity Risks That SEC Examiners Will Look For in Examinations of Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 17 (May 2, 2014); and “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).

FCA Urges Hedge Fund Managers to Prepare for MiFID II

The recast Markets in Financial Instruments Directive (MiFID II) will significantly alter the environment in which hedge fund managers operate in Europe: it will bring in new conduct requirements for hedge fund managers; introduce new transparency and trade reporting regimes; set limits in relation to the dark trading of equities and commodities derivatives trading; bring in new regulations for high frequency trading; and require certain new authorizations.  David Lawton, the Director of Markets Policy and International at the U.K. Financial Conduct Authority (FCA), delivered a speech entitled “MiFID II – The Road Ahead” at the FCA’s recent MiFID II Conference in London.  Noting that MiFID II legislation “has huge impact on the industry,” Lawton identified the topic as a “major priority” for the FCA.  It is essential that all hedge fund managers trading in Europe fully understand the changes that will be brought about by the new MiFID II regime and keep abreast of the implementation timetable.  Accordingly, his speech provided hedge fund managers a glimpse into the FCA’s current vision with respect to MiFID II rule-making and implementation, which Lawton noted should be “useful for planning purposes,” although the rules and timelines discussed will remain a moving target.  Further, the speech shed light for hedge fund managers on how the FCA intends to engage with the industry and elucidated two particularly contentious topics – bond market liquidity and commodity derivatives.  This article summarizes the speech, outlining the FCA’s timelines and engagement strategy and highlighting the key messages for hedge fund managers.  For more on MiFID II, see “ESMA Releases Final Report on MiFID II Technical Standards for Hedge Fund Management Firms,” Hedge Fund Law Report, Vol. 8, No. 28 (Jul. 16, 2015); “Simmons & Simmons and Advise Technologies Provide Comprehensive Overview of MiFID II (Part Two of Two),” Hedge Fund Law Report, Vol. 8, No. 25 (Jun. 25, 2015); and “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers,” Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015). 

Rajaratnam Sued by Younger Brother for Alleged Unpaid Compensation and Indemnification of Legal Expenses

Rengan Rajaratnam has filed a civil action in New York State Supreme Court against his brother Raj and various Galleon entities, claiming that he was fraudulently induced into settling his commission and compensation claims for a small fraction of what he was owed, and that he has a right to indemnification from the defendants for legal and other expenses he incurred in defending himself in the civil and criminal insider trading cases against him.  He seeks damages of at least $13.5 million, together with interest, attorneys’ fees and disbursements.  This article summarizes his allegations.  For coverage of other high-stakes compensation or severance disputes, see “New York Court Assesses the Validity of a Former Portfolio Manager’s Claim against a Fund Management Company for Unvested Performance Compensation,” Hedge Fund Law Report, Vol. 8, No. 18 (May 7, 2015); “U.S. District Court Evaluates FINRA Arbitration Decision in High-Stakes Severance Dispute Between UBS and Former Portfolio Manager,” Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011); and “New York State Supreme Court Upholds Former Portfolio Managers’ Claims Against Hedge Fund Manager Touradji Capital,” Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009).

Hedge Fund General Counsel Kher Sheng Lee Moves to AIMA

Kher Sheng Lee recently joined the Alternative Investment Management Association (AIMA) in its Singapore office.  He will take up the position of AIMA’s managing director, global deputy head of government affairs and head of APAC government affairs.  For research from AIMA, see “Structures and Characteristics of Activist Alternative Investment Funds,” Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015).  Lee has worked closely with AIMA over several years.  He was the first chair of AIMA’s sound practices committee, an inaugural member of the asset management standing committee and co-chair of the Hong Kong regulatory committee.  For more on Hong Kong, see “How Can Hedge Fund Managers Understand and Navigate the Perils of Insider Trading Regulation and Enforcement in Hong Kong and the People's Republic of China,” Hedge Fund Law Report, Vol. 6, No. 13 (Mar. 28, 2013); and “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part One of Four),” Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011).

Most-Read Articles