Jul. 14, 2016

Caspersen Fraud Reminds Institutional Investors to Look Beyond a Hedge or Private Equity Fund’s Name to Verify Its Structure and Management

Unlike alternative mutual funds and other registered investment companies, hedge and private equity funds are not subject to regulations regarding what they can be named. See “Hedge Fund Names: What a Hedge Fund Manager Should Do Before It Starts Using a Name” (Mar. 16, 2012). It is therefore incumbent on investors to look beyond the name of any fund in which it is considering investing and conduct due diligence to verify the actual structure, sponsorship and management of the entity. The recent guilty plea of Andrew Caspersen is a reminder of this and the peril faced by institutional and other sophisticated investors that fail to conduct this necessary due diligence. Using confusingly named entities and bank accounts, Caspersen, an investment principal and partner in two alternative asset management firms, perpetrated a scheme of securities and wire fraud. This article summarizes the DOJ’s criminal complaint against Caspersen and details several lessons for institutional investors to protect themselves from fraud. For another scheme involving the sale of bogus promissory notes in the hedge fund industry, see “Federal Judge Approves Settlement Agreements Arising out of Marc Dreier’s Criminal Fraud; Hedge Fund Victims ‘Squabble’ Over Proposed Recovery” (Feb. 17, 2010). For more on conducting due diligence, see “Why Should Hedge Fund Investors Perform On-Site Due Diligence in Addition to Remote Gathering of Information on Managers and Funds?”: Part One (Jan. 29, 2015); Part Two (Feb. 5, 2015); and Part Three (Feb. 12, 2015).

Leading Law Firms Discuss Hedge Fund Marketing and Distribution Opportunities in a Post-Brexit World (Part Two of Two)

The June 23, 2016, referendum vote in Britain to leave the E.U. – commonly referred to as “Brexit” – will undoubtedly have a significant impact on a number of business sectors, including U.S. hedge and other private fund managers with U.K. affiliates. Some U.S. private fund managers, in connection with the adoption of the Alternative Investment Fund Managers Directive (AIFMD), established U.K. affiliates to take advantage of the AIFMD passport regime and market to investors in the European Economic Area. See “Passports, Platforms and Private Placement: Options for Marketing Funds in Europe in the Post-AIFMD Era” (Apr. 30, 2015). Whether such advisers will be able to continue to rely on the AIFMD and other E.U. passports will be determined over the next few years as the U.K. negotiates its exit terms from the Union. In an effort to help our subscribers understand the implications of the vote for hedge fund managers, the Hedge Fund Law Report conducted interviews with law firm partners focused on Brexit and compiled a summary and analysis of the partners’ insights, along with the client advice memoranda of leading law firms with hedge fund practices, in a two-part series. This second article addresses the options available for fund managers concerned about how they can continue to market and distribute their products in the E.U. The first article provided a detailed summary of the time frame for any potential changes resulting from the vote, as well as analysis of possible terms under which the U.K. might leave the E.U. and the distinction between a “hard” and “soft” Brexit. For additional coverage of Brexit and its impact on hedge funds, see “With Brexit Looming and New Fund Structures Available, U.S. Hedge Fund Managers Face Risks and Opportunities for Marketing in Europe” (Jun. 9, 2016).

How Hedge Fund Claim Traders Can Protect Their Interests in the Visa/MasterCard Litigation

On June 30, 2016, the Second Circuit Court of Appeals (Second Circuit) struck down a class action settlement (Settlement) in the case In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation (Visa/MasterCard Litigation). Although the Settlement would have resolved whether Visa, MasterCard and various other financial institutions violated antitrust laws by establishing and enforcing practices that charged merchants excessive fees for accepting Visa- and MasterCard-branded credit and debit cards while also limiting merchants’ ability to steer customers toward other forms of payment, the Second Circuit objected to the Settlement for failure to adequately represent the interests of disparate classes of plaintiffs in violation of the Federal Rules of Civil Procedure and the Due Process Clause. In a guest article, Darius J. Goldman and Cristina E. Bautista, partner and associate, respectively, at Katten, provide an overview of the reasoning behind the Second Circuit’s rejection of the Settlement and analyze issues that claims traders investing in the Visa/MasterCard Litigation should consider. For Goldman’s prior article on the subject, see “What Hedge Fund Claim Traders Need to Know About the Visa/MasterCard Settlement” (Jun. 25, 2015). For additional insight from Katten partners, see “Insurance Products Provide Tax-Efficient Means for Investors to Access Hedge Funds” (Feb. 25, 2016); “Going Private: Mechanical Considerations When Closing a Hedge Fund to Outside Investors (Part Three of Three)” (Feb. 4, 2016); and “Katten Forum Identifies Best Practices for Hedge Fund Managers Regarding Best Execution, Soft Dollars, Principal Trades, Agency Cross Trades, Cross Trades and Trade Errors” (Mar. 13, 2014). 

What D&O and E&O Insurance Will and Will Not Cover, and Other Hot Topics in the Hedge Fund Insurance Market

As hedge fund managers anticipate potential fallout from regulatory enforcement actions, it is critical to have a sophisticated understanding of the mechanics of directors and officers (D&O) and errors and omissions (E&O) insurance, as well as the types of liability covered by those policies. These issues were the subject of a recent webinar hosted by Seward & Kissel. During the discussion, Mark Hyland, a partner at Seward & Kissel, and Jason Duffy, a partner and founder of Fieldstone Insurance Group, explained how insurance can be used to anticipate and mitigate the adverse financial impact of covered acts or omissions. This article analyzes the key points from the webinar. For a comprehensive overview of D&O and E&O insurance, see “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities” (Nov. 17, 2011). For additional insight from Seward & Kissel, see “Reduced Management Fees and Narrower Liquidity Among Trends in New Hedge Funds” (Mar. 31, 2016); and our two-part coverage of the Seward & Kissel private funds forum: “Trends in Hedge Fund Seeding Arrangements and Fee Structures” (Jul. 23, 2015); and “Key Trends in Fund Structures” (Jul. 30, 2015). 

Dechert Panel Discusses Recent Hedge Fund Fee and Liquidity Terms, the Growth of Direct Lending and Demands of Institutional Investors 

A recent program sponsored by Dechert offered an overview of the current hedge fund landscape, focusing on fee and liquidity terms, the growth of direct lending, prime brokerage and institutional investors’ perspectives on alternative investments. The program featured John D’Agostino, a managing director at DMS Offshore Investment Services Ltd., and Dechert partners Matthew K. Kerfoot, David A. Vaughan, Karl J. Paulson Egbert and Timothy Spangler. This article highlights the panelists’ primary insights. For further insight from Kerfoot, see “Dechert Webinar Highlights Key Deal Points and Tactics in Negotiations Between Hedge Fund Managers and Futures Commission Merchants Regarding Cleared Derivative Agreements” (Apr. 18, 2013). For additional commentary from Vaughan, see “A Practical Comparison of Reporting Under AIFMD Versus Form PF” (Oct. 30, 2014). For further remarks from Egbert, see “Capital-Raising Opportunities, Regulatory Hurdles and Cultural Challenges Faced by Hedge Fund Managers in China and the Middle East” (Jun. 23, 2016).

ESMA Chair Outlines Rulemaking Authority and Implementation of MiFID II 

A recent speech by Steven Maijoor, chair of the European Securities and Markets Association (ESMA), at the Financial News 20th Anniversary Awards for Excellence, European Finance, 1996-2016, offered a recap of ESMA’s recent efforts to develop rules for E.U. member states with a view to minimizing risk. Maijoor described the processes and procedures through which ESMA and the European Commission (EC) have worked out the pending revisions of the E.U. Markets in Financial Instruments Directive (commonly referred to as “MiFID II”). Maijoor delivered a second speech to the Committee on Economic and Monetary Affairs of the European Parliament, in which he provided a more detailed and technical analysis of the status of MiFID II implementation. Maijoor’s remarks provide valuable insight to hedge fund managers about the relative authority of ESMA and the implementation and anticipated revisions to MiFID II, which affect transparency, position limits and derivatives trading. This article highlights the salient points from his two speeches. For coverage of Maijoor’s 2015 annual statement to the Committee on Economic and Monetary Affairs of the European Parliament, see “ESMA Chair Highlights Upcoming Focus on Supervisory Convergence” (Oct. 1, 2015). For analysis of a recent speech Maijoor delivered to the Asian Financial Forum, see “ESMA Chair Calls for Increased Transparency and Regulatory Convergence As Interest Rates Rise” (Jan. 28, 2016).

Phillip Sacks Joins Dechert’s Financial Services Group in Dubai

Dechert recently announced that Phillip Charles Sacks has joined its Dubai office as a partner in its financial services group. Sacks will advise sovereign wealth funds, financial institutions and fund managers on various corporate and regulatory aspects of onshore and offshore fund structures, including venture capital funds, real estate funds and hedge funds. See “Why and How Do Middle Eastern Sovereign Wealth Funds, Pension Funds and High Net Worth Individuals Invest in Private Funds?” (Jun. 6, 2013); and “Why and How Do Sovereign Wealth Funds Invest in Hedge Funds?” (Mar. 28, 2013). For commentary from Dechert practitioners, see “Capital-Raising Opportunities, Regulatory Hurdles and Cultural Challenges Faced by Hedge Fund Managers in China and the Middle East” (Jun. 23, 2016); and “What the Evolving European Marketing Environment Means for Hedge Fund GCs and CCOs” (Nov. 12, 2015).