Feb. 4, 2016

Going Private: Mechanical Considerations When Closing a Hedge Fund to Outside Investors (Part Three of Three)

The decision by a hedge fund manager to transition to a family office or other private investment structure is only the first step in a potentially complicated process. A manager converting its fund faces issues involving notice to and redemption of outside investors; liquidation of significant portions of the fund’s portfolio; and payment of conversion costs. Throughout the process, managers must also ensure that investors are treated fairly. This final article in our three-part series details the mechanics of taking a hedge fund private, including redemption of outside investors and allocation of conversion costs. See “Dechert Global Alternative Funds Symposium Highlights Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates” (May 21, 2015). The first article in the series examined the “going private” trend and explored the factors a hedge fund manager should consider when deciding whether to convert its hedge fund, as well as the options available once that decision has been made. The second article examined the operational considerations a hedge fund manager faces when converting its hedge fund, including ongoing regulatory obligations and staffing concerns.

Stockholder Appraisal Actions Present an Attractive Litigation-Based Strategy for Hedge Fund Managers

Hedge fund managers are increasingly turning to a long-underused litigation-based mechanism to generate investment returns. That mechanism – the Delaware stockholder appraisal action – allows managers controlling shares in a company targeted for merger or consolidation to significantly increase the value of those shares through a pure litigation play. In a guest article, Ben Quarmby and Hassan A. Shah, a partner and an associate, respectively, at MoloLamken, review how appraisal actions work and describe some recent results. The article then discusses the advantages of using appraisal over traditional stockholder litigation, as well as some recent legislative and judicial pushback. Finally, the authors consider the potential opportunity that shareholder appraisal actions present for hedge fund managers and other asset managers. For additional insight from Quarmby, see “Measures Hedge Fund Managers Can Implement to Maximize Protection of Their Trade Secrets” (Dec. 6, 2012). For commentary from other MoloLamken practitioners, see “FCPA Considerations for the Private Fund Industry: An Interview With Former Federal Prosecutor Justin Shur” (May 23, 2014); “How Private Fund Managers Can Manage FCPA Risks When Investing in Emerging Markets” (Jan. 10, 2013); and “Political Intelligence Firms and the STOCK Act: How Hedge Fund Managers Can Avoid Potential Pitfalls” (Apr. 5, 2012).

How Hedge Fund Managers Can Raise Capital and Expand Despite Increasing Regulation and Investor Demands

In an environment where investors remain risk averse due, in part, to falling asset prices, hedge fund managers must carefully consider how to market their funds and grow their businesses. With increasing regulation in Europe and investor demands in the U.S., managers must find a way to woo investors and explore the various structures and options available for doing so, including joining an established platform, seeking a strategic investment or offering founder shares. In addition to other topics, speakers at the annual Sadis & Goldberg Alternative Investment Seminar discussed these challenges. This article summarizes the salient points made about marketing hedge funds in Europe and the U.S. and expanding a manager’s business, as well as the trend of converting to a family office or otherwise “going private.” For more from Sadis & Goldberg lawyers, see “Understanding the Benefits and Uses of Series LLCs for Hedge Fund Managers” (Nov. 15, 2012); and “Sullivan v. Harnisch and SEC Proposed Whistleblower Rules Bolster Internal Compliance Programs While Creating Catch-22 for Compliance Officers” (Mar. 18, 2011).

Essential Tools for Hedge Fund Managers to Combat Escalating Cyber Threats

Cybersecurity breaches can cause untold financial and reputational damage, spawn private litigation and draw adverse regulatory scrutiny. A recent webinar sponsored by Backstop Solutions Group reviewed the evolving cyber threat landscape and related regulatory environment, and suggested tools to mitigate vendor risks and ensure appropriate cybersecurity governance and employee training. The program, “Cybersecurity – Protecting Investor Data,” was moderated by Chris DeNigris, a Backstop manager. It featured Kevin Holl, vice president at Evanston Capital Management; Natasha G. Kohne, a partner at Akin Gump; and Michael Neuman, a Backstop vice president. This article summarizes the primary takeaways from the discussion. See “How Hedge Fund Managers Can Meet the Cybersecurity Challenge: A Snapshot of the Regulatory Landscape (Part One of Two)” (Dec. 3, 2015); and “Benchmarking and Best Practices for Hedge Fund Manager Cybersecurity” (Feb. 5, 2015).

SEC to Return Insider Trading Settlement Payment to Level Global

The U.S. Court of Appeals for the Second Circuit’s landmark decision in U.S. v. Newman has had many implications for prosecuting inside traders; it has led the DOJ and SEC to revisit, and in many instances vacate, a number of other recent insider trading settlements, convictions and guilty pleas. See our two part series on the “Supreme Court’s Denial of Cert in Newman”: Part One (Oct. 29, 2015); and Part Two (Nov. 5, 2015). In an unusual twist, Level Global Investors, L.P. (Level Global) – one of the casualties of the SEC’s multi-year battle to root out insider trading in the hedge fund space – sought to vacate its settlement with the SEC, even demanding that the SEC refund its settlement payment. The SEC did not oppose Level Global’s motions, and on January 26, 2016, the court vacated the settlement against Level Global and ordered the SEC to refund its settlement payment of approximately $21.5 million. This article provides a brief overview of the litigation, Level Global’s motion and the ensuing order. For another insider trading action arising out of the SEC investigation of Level Global, see “SEC’s Insider Trading Suit Against Former Level Global Trader Illustrates the Risk of Retaining a Former Public Company Employee as a Consultant” (Dec. 12, 2013).

Hedge Fund Legal Personnel May Fall Under U.K. Senior Managers Regime

In late 2015, the U.K. government announced that it would extend the new Senior Managers and Certification Regime (Senior Managers Regime) to all sectors of the financial services industry, including hedge fund managers and other asset managers. Under the Senior Managers Regime, senior management personnel within hedge fund managers and other financial services firms will be subject to increased personal responsibility, robustly enforced by U.K. regulatory authorities. See “U.K. Imposes New Statutory Duty of Responsibility on Hedge Fund Senior Managers” (Oct. 22, 2015). The U.K. Financial Conduct Authority (FCA) recently published a statement addressing uncertainty as to whether a firm’s legal function would be subject to the Senior Managers Regime. This article summarizes the FCA’s position and discusses the impact of the announcement on legal personnel of hedge fund managers. For more on hedge fund manager employee liability, see “Employees of Hedge Fund Managers May Be Liable for Failing to Prevent Fraud” (Jul. 30, 2015); and “U.K. Appellate Court Holds That Hedge Fund Manager Employees May Be Personally Liable” (Feb. 28, 2013).

Investment Funds Attorney Marie-Claire Fudge Joins Ogier’s Jersey Team

Ogier has announced the arrival of investment funds specialist Marie-Claire Fudge as a managing associate in Jersey. Her practice covers a wide range of corporate and regulatory work, including advising on the set-up and launch of open- and closed-end funds, as well as providing initial and ongoing advice to funds, investment managers and advisers, promotors, sponsors, directors, general partners, service providers and investors. For insight from current or former Ogier attorneys, see “How Safe Is It to Ignore Foreign Tax Claims or Judgments Against Cayman Islands Hedge Funds in the Context of a Winding Up of the Fund?” (Feb. 2, 2012); “If a Hedge Fund Goes Into Liquidation Between the Time of an Investor’s Subscription and Issuance of Fund Shares to That Investor, Who Owns the Money Paid for the Fund Shares?” (Jun. 8, 2011); and our three-part interview with Ogier partner Colin MacKay on “The Evolution of Offshore Investment Funds”: Part One (Jul. 29, 2009); Part Two (Aug. 5, 2009); and Part Three (Sep. 17, 2009).

Holland & Knight Expands Financial Services Team With Regulatory Attorney Rebecca Leon

Rebecca Leon has joined Holland & Knight’s financial services practice group in Miami as a partner. Leon advises broker-dealers, investment advisers, fund managers, banks and wealth managers on a wide variety of U.S. and international regulatory, transactional and operational issues. For more on broker-dealers, 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?” (Oct. 25, 2013).