Oct. 20, 2016

What the SEC’s Enforcement Statistics Reveal About the Regulator’s Focus on Hedge Funds and Investment Advisers

The SEC recently announced that it brought a record 868 enforcement actions in fiscal year 2016, which closed on September 30. As in prior years, these cases were brought against a broad spectrum of players in the financial industry – including investment advisers, investment companies, industry gatekeepers and broker-dealers – covering a wide range of securities law violations, including insider trading, market manipulation, delinquent filings and Foreign Corrupt Practices Act violations. SEC Chair Mary Jo White stated in the press release that the agency’s enforcement program is a “resounding success.” She credited the increase in actions to the use of new data analytics to uncover fraud, which has enhanced the SEC’s ability to litigate such cases and its capability to bring novel and significant actions to protect investors and the markets. For more on the SEC’s use of technology in the examination process, see “SEC’s Rozenblit and Law Firm Partners Explain the SEC’s Enforcement Priorities and Offer Tips on How Hedge Fund and Private Equity Managers Can Avoid Enforcement Actions (Part Three of Four)” (Jan. 15, 2015); and “OCIE Director Andrew Bowden Identifies the Top Three Deficiencies Found in Hedge Fund Manager Presence Exams and Outlines OCIE’s Examination Priorities” (Oct. 10, 2014). This article summarizes key data from the report relevant to hedge fund and private equity managers and includes reactions from industry experts regarding the SEC’s enforcement priorities. 

SEC Action Emphasizes Importance of Safeguarding Analyst Reports and Opinions From Improper Disclosure

On October 12, 2016, the SEC announced yet another insider trading settlement, charging Deutsche Bank with failing to maintain proper safeguards over material nonpublic information generated by the bank’s research analysts from 2012 through 2014; improperly publishing a research report that inaccurately reflected its legal analyst’s views; and failing to maintain appropriate electronic records to deliver to regulators during their investigation. This article outlines Deutsche Bank’s alleged misconduct, the SEC’s charges and the terms of the SEC settlement order, as well as insight into the broader circumstances surrounding this settlement. For analysis of the implications of sharing research by hedge fund managers, see “Selective Dissemination of Research Through Surveys, Trade Ideas Platforms, Huddles and Desk Research: What Are the Implications for Hedge Funds?” (Aug. 2, 2012). For practical steps that hedge fund managers can take to avoid enforcement actions related to insider trading, see our three-part series: “Four Insider Trading Enforcement Trends With Direct Impact on Hedge Fund Trading Strategies” (Nov. 13, 2014); “Eight Actions That Hedge Fund Managers Can Take to Avoid Insider Trading Violations” (Nov. 20, 2014); and “Six Compliance Requirements and Four Enforcement Themes for Private Fund Advisers” (Jan. 8, 2015). For coverage of another recent SEC action targeting insider trading, see “Alleging Dozens of Violations, SEC Charges Leon Cooperman and Omega Advisors With Insider Trading and Failing to Make Regulatory Filings” (Sep. 29, 2016).

How Hedge Fund Managers Can Address Common Issues and Risks When Enforcing Judgments Against Debtors

Numerous hedge funds are adept at making investments based on the outcome of litigation. While the main type of foray garnering attention in this field has been litigation finance, the acquisition of unexecuted judgments has become an increasingly attractive opportunity. For more on litigation funding as an investment, see “In Turbulent Markets, Hedge Fund Managers Turn to Litigation Funding for Absolute, Uncorrelated Returns” (Jun. 24, 2009). Before acquiring one judgment, let alone an entire portfolio of them, however, there are a number of issues that a hedge fund manager’s in-house counsel must consider in order to accurately render advice to management. In a guest article, Craig Weiner and Michael A. Kolcun, partner and associate, respectively, at Robins Kaplan, review the considerations relevant to investors in unexecuted judgments or that hedge funds should consider before acquiring a pool of such judgments. Specifically, they outline considerations for determining if a judgment is legally enforceable and the likelihood of successfully enforcing that judgment; tools to maximize recovery and minimize expenses in the enforcement process; and advice for dealing with recalcitrant debtors. See also “Enforcement in the Cayman Islands of U.S. and Other Foreign Judgments: How Safe Is It for Hedge Fund Managers to Allow Judgment to Be Entered by Default?” (Jul. 1, 2011).

Newly Appointed Chief of New York’s Investor Protection Bureau Describes Its Enforcement of the Martin Act and How Managers Can Avoid Prosecution

Attorney General Eric T. Schneiderman recently announced the appointment of Katherine C. Milgram as the new Chief of the New York Attorney General’s Investor Protection Bureau (Bureau), part of the Division of Economic Justice. Prior to this appointment, Milgram initially served as Assistant Attorney General, and later as Deputy Chief, of the Bureau. Milgram’s primary responsibility in her new capacity will be to enforce New York’s securities law under the Martin Act. She recently spoke with the Hedge Fund Law Report about the investigative efforts of the Bureau, the type of fund manager behavior it targets and its objectives in pursuing certain types of rewards under the Martin Act. For more on the Martin Act in the hedge fund context, see “New York Court of Appeals Holds That the Martin Act, New York’s ‘Blue Sky’ Law, Does Not Preempt Common Law Claims for Breach of Fiduciary Duty and Gross Negligence” (Jan. 12, 2012); “First Department Decision May Give Aggrieved Hedge Fund Investors an Unexpected and Powerful Avenue of Redress” (Mar. 11, 2011); and “New York Supreme Court Rules That Aris Multi-Strategy Funds’ Suit Against Hedge Funds for Fraud May Proceed, but Negligence Claims Are Preempted Under Martin Act” (Dec. 23, 2009).

Attorney-Consultant Privilege? Key Considerations for Fund Managers When Utilizing, Invoking and Waiving the Kovel Privilege for Consultants (Part One of Three) 

Private fund managers frequently rely on assistance from legal counsel to bolster their operations and compliance practices, comfortable that the attorney-client privilege will shield these efforts from the SEC and others. As managers increasingly engage consultants to audit their compliance programs, a logical concern is whether similar protections are available to protect those efforts. For example, a manager engaging a consultant to conduct a risk assessment of its cybersecurity preparedness would not want the results to become public. See “Former Prosecutors Address Trends in Cybersecurity for Alternative Asset Managers, Diligence When Acquiring a Company and Breach Response Considerations” (Oct. 6, 2016). This three-part series describes the use of so-called “Kovel arrangements” by private fund managers to extend the attorney-client privilege to interactions with consultants. This first article describes the requirements of the Kovel privilege as established by case law, as well as critical considerations for managers when deciding whether to invoke or waive the privilege when interacting with the SEC, other regulators or litigants. The second article will detail the requisite features of a fully-compliant Kovel arrangement, including necessary features of engagement letters and the daily implementation of the arrangement. The third article will examine circumstances under which it is and is not appropriate for fund managers to employ Kovel arrangements. For more on the attorney-client privilege, see “How Hedge Fund Managers May Address the Practical Implications of the NY Court of Appeals’ Attempt to Clarify the Common Interest Doctrine” (Sep. 29, 2016); and “D.C. Circuit Confirms Applicability of Attorney-Client Privilege to Internal Investigations” (Aug. 7, 2014). 

Seward & Kissel Private Funds Forum Offers Practical Steps for Fund Managers to Address HSR Act Enforcement, Tax Reforms, Brexit Uncertainty, MiFID II, Cybersecurity and Side Letters

Years after the financial crisis, private funds in the U.S. and Europe continue to be affected by factors as varied as the trends in enforcement of the Hart-Scott-Rodino Antitrust Improvements Act of 1976; reforms to the U.S. tax code; ongoing uncertainty over Brexit, including whether the U.K. will make a “hard” or “soft” departure from the E.U.; cybersecurity risks; and selective disclosure concerns. These issues were the focus of a segment of the second annual Private Funds Forum co-produced by Bloomberg BNA and Seward & Kissel (S&K) on September 15, 2016. The panel was moderated by S&K partner Robert Van Grover and featured James E. Cofer and David R. Mulle, also partners at S&K; Richard Perry, a partner at Simmons & Simmons; Matthew B. Siano, managing director and general counsel of Two Sigma Investments; and Mark Strefling, general counsel and chief operating officer of Whitebox Advisors. This article highlights the salient points made by the panel. For coverage of the first segment of this forum, see our two-part series: “How Managers Can Mitigate Improper Dissemination of Sensitive Information” (Sep. 22, 2016); and “How Managers Can Prevent Conflicts of Interest and Foster an Environment of Compliance to Reduce Whistleblowing and Avoid Insider Trading” (Sep. 29, 2016). On Tuesday, November 1, 2016, at 10:00 a.m. EDT, Mulle and fellow S&K partner Steve Nadel will expand on issues relating to side letters in a complimentary webinar co-produced by the Hedge Fund Law Report and S&K. For more information or to register for the webinar, please send an email to rsvp@hflawreport.com.

Morrison & Foerster Adds Corporate and Funds Partner in New York

Global law firm Morrison & Foerster has strengthened its corporate and funds practices in New York with the hiring of Tracy A. Bacigalupo. She advises investment companies, asset managers, real estate investment trusts and emerging companies on a range of corporate transactions. For more on emerging managers, see “Can Emerging Hedge Fund Managers Use Technology to Satisfy Business Continuity Requirements and Mitigate Third-Party Risk?” (Sep. 3, 2015); and “Establishing a Hedge Fund Manager in Seventeen Steps” (Aug. 27, 2015). For coverage of another recent hire at the firm, see “Investment Funds Partner Joins Morrison & Foerster’s London Office” (Sep. 8, 2016).