Category Archives: News and Commentary

CFTC Head Addresses Futures Industry in Chicago

Futures Industry Association Annual Expo

CFTC Chairman Gary Gensler today spoke at the Futures Industry Association’s annual expo in Chicago. While most of the Chairman’s speech focused on the proposed regulation of the OTC derivatives markets, Chairman Gensler also discussed the recent SEC and CFTC Harmonization report. As you can imagine, Gensler is for increasing regulation of the entire financial markets. Below I have included some of the more interested quotes which can be found in the text of the speech text of Chairman Gensler’s speech.

The CTA Expo was going on as well during this time and I will be writing more articles on the speakers at this conference over the next few days.

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Both of the committees’ bills include three important elements of regulatory reform: First, they require swap dealers and major swap participants to register and come under comprehensive regulation. This includes capital standards, margin requirements, business conduct standards and recordkeeping and reporting requirements. Second, the bills require that dealers and major swap participants bring their clearable swaps into central clearinghouses. Third, they require dealers and major swap participants to use transparent trading venues for their clearable swaps.

The challenge remains, though, determining which transactions should be covered by these reforms. I believe that we must bring as many transactions under the regulatory umbrella as possible. This will best accomplish the two principal goals of reform: lowering risk to the American public and promoting transparency of the markets.

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To promote market transparency, all standardized OTC products should be moved onto regulated exchanges or trade execution facilities. This is the best way to reduce information deficits for participants in these markets. Transparency greatly improves the functioning of the existing securities and futures markets. We should shine the same light on the swaps markets. Increasing transparency for standardized derivatives should enable both large and small end-users to obtain better pricing on standard and customized products.

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Some have articulated a false choice between stronger regulation on the one hand and a free market on the other. Rules improve markets, however, by enhancing efficiency and integrity. Traffic lights require you to stop your car, but they also ensure that traffic is orderly and efficient. They reduce risks for every person on the highway. Similarly, this country’s markets work best with clear rules of the road.

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Last year’s crisis also highlighted the need for regulators to change. In that regard, the CFTC last week released a joint report with the SEC to bring greater consistency, where appropriate, to our regulatory approaches. While the missions of the CFTC and the SEC may differ, our goal is the same: to protect the public, enhance market integrity and promote transparency. In preparing our report, we set turf aside and focused on those changes that would best benefit the markets and the American people.

We jointly made 20 recommendations where we can change our statutes and regulations to enhance both agencies’ enforcement powers, strengthen market and intermediary oversight and facilitate greater operational coordination.

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Other related hedge fund law articles include:

Hedge Fund Manager Charged with Insider Trading

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SEC Brings Case Against Raj Rajaratnam

Below is another case of a hedge fund manager who was alledgedly engaged in insider trading. The SEC seems particularly excited about this cased because of the high profile nature of the manager who was involved. The major charge is against Raj Rajaratnam who reportedly has a net worth in excess of $1 billion and who is a member of the Forbes 400 richest persons in the world.

There will undoubtedly be continued press in this case which is not good news for the hedge fund industry. The industry has been subject to criticism and increased calls for regulation for the last year and high profile cases like this one only serve to rile up members of congress. The SEC seems to be particularly proud about this “catch” as the agency has itself been under increasing scrutiny as the details of the fumbled Madoff case have been made public.

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SEC Charges Billionaire Hedge Fund Manager Raj Rajaratnam with Insider Trading

FOR IMMEDIATE RELEASE
2009-221

High-Ranking Corporate Executives Also Charged in Scheme That Generated More Than $25 Million in Illicit Gains

Washington, D.C., Oct. 16, 2009 — The Securities and Exchange Commission today charged billionaire Raj Rajaratnam and his New York-based hedge fund advisory firm Galleon Management LP with engaging in a massive insider trading scheme that generated more than $25 million in illicit gains. The SEC also charged six others involved in the scheme, including senior executives at major companies IBM, Intel and McKinsey & Company.

The SEC’s complaint, filed in federal court in Manhattan, alleges that Rajaratnam tapped into his network of friends and close business associates to obtain insider tips and confidential information about corporate earnings or takeover activity at several companies, including Google, Hilton and Sun Microsystems. He then used the non-public information to illegally trade on behalf of Galleon.

“This complaint describes a web of fraud that has been unraveled,” said SEC Chairman Mary L. Schapiro.

“What we have uncovered in the trading activities of Raj Rajaratnam is that the secret of his success is not genius trading strategies. He is not the astute study of company fundamentals or marketplace trends that he is widely thought to be. Raj Rajaratnam is not a master of the universe, but rather a master of the rolodex,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “He cultivated a network of high-ranking corporate executives and insiders, and then tapped into this ring to obtain confidential details about quarterly earnings and takeover activity.”

In addition to Rajaratnam and Galleon, the SEC’s complaint charges:

Danielle Chiesi of New York, N.Y. — a portfolio manager at New Castle Funds.
Rajiv Goel of Los Altos, Calif. — a managing director at Intel Capital, an Intel subsidiary.
Anil Kumar of Saratoga, Calif. — a director at McKinsey & Company.
Mark Kurland of Mount Kisco, N.Y. — a Senior Managing Director and General Partner at New Castle.
Robert Moffat of Ridgefield, Conn. — a senior vice president at IBM.
New Castle Funds LLC — a New York-based hedge fund

According to the SEC’s complaint, Rajaratnam and Galleon traded on inside information about the following events or transactions:

An unnamed source, identified in the SEC’s complaint as Tipper A, obtained inside information about earnings announcements at Polycom and Google, as well as a takeover announcement of Hilton. Tipper A then allegedly provided this information to Rajaratnam, who used it to trade on behalf of Galleon.
Goel provided inside information to Rajaratnam about certain Intel quarterly earnings and a pending joint venture concerning Clearwire Corp., in which Intel had invested. Rajaratnam then used this information to trade on behalf of Galleon. As payback for Goel’s tips, Rajaratnam, or someone acting on his behalf, executed trades in Goel’s personal brokerage account based on inside information concerning Hilton and PeopleSupport, which resulted in nearly $250,000 in illicit profits for Goel.
Kumar obtained inside information about pending transactions involving AMD and two Abu Dhabi-based sovereign entities, which he shared with Rajaratnam. Rajaratnam then traded on the basis of this information on behalf of Galleon.
Chiesi obtained inside information from an executive at Akamai Technologies and traded on the information on behalf of a New Castle fund, netting a profit of approximately $2.4 million. Chiesi also passed on the inside information to Rajaratnam, who then traded on behalf of Galleon.

The SEC also alleges that Moffat provided inside information to Chiesi about Sun Microsystems. Moffat obtained the information when IBM was contemplating acquiring Sun. Chiesi then allegedly traded on the basis of this information on behalf of New Castle, making approximately $1 million in profits.

The SEC’s complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and, except for Kumar and Moffat, violations of Section 17(a) of the Securities Act of 1933 and. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Goel, Kumar and Moffat from acting as an officer or director of any registered public company.

The SEC acknowledges the assistance and cooperation of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

The SEC’s investigation is continuing.

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For more information, contact:
David Rosenfeld
Associate Director, SEC’s New York Regional Office
(212) 336-0153

Sanjay Wadhwa
Assistant Director, SEC’s New York Regional Office
(212) 336-0181

http://www.sec.gov/news/press/2009/2009-221.htm

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CTA Expo 2009

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Commodity Trading Advisor Conference

Next week there will be a conference for Commodity Trading Advisors held in Chicago at the Hotel Monaco. The conference, entitled the CTA Expo 2009, will be held on Wednesday and will feature a variety of topics of interest to CTAs. The agenda includes:

Continental Breakfast
Marketing for Small CTAs
Compliance in a Changing Environment
Purchased Lead Lists and How to Use Them
Web Site Development and Internet Marketing
Marketing to Introducing Brokers
Keynote Speaker
An Outsiders View of Managed Futures
Managing Electronic Executions
Executing on the Electronic Markets
The Media and the CTA
Closing Cocktail Party

I will be representing my firm, Cole-Frieman & Mallon LLP, at the conference and I look forward to meeting with the different traders and service providers at the event. Each entrant will also receive a CTA Directory which will include a “tear sheet” on all of the groups which attended. Please see the Cole-Frieman & Mallon LLP description of CTA services.

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Event information can be found here. There is also a CTA Expo LinkedIn Group.

CTA EXPO 2009
October 21, 2009
Hotel Monaco Chicago, Illinois

CTA EXPO consists of a day of roundtables and seminars for Commodity Trading Advisors on marketing strategy combined with an all day schedule of thirty minute presentations by individual CTAS to small groups of professional money raisers, asset allocators and interested clients who are seeking to identify additional trading talent.

The debut conference in 2008 sold out in advance and was attended by over thirty-five CTAs and over sixty people who registered as professional money raisers and asset allocators. We have increased capacity for 2009 and interest in this year’s event has already been tremendous and we are anticipating another sold out event.

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The hedge fund law blog is committed to providing useful and easy to understand information for CTAs and CPOs which can be found in our CTA and CPO Registration and Compliance Guide. For more information on registration or compliance services please contact Bart Mallon, Esq. at 415-868-5345.

OTC Derivatives Markets Act of 2009 Passes House Committee Vote

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CFTC Chairman Gensler Applauds “Historic Progress”

In a first step towards increased regulation of the over-the-counter derivatives markets, the House Financial Services Committee approved the Over-the-Counter Derivatives Markets Act of 2009. The act is one of several initiatives to increase regulatory oversight of the financial markets and if passed by Congress would be signed into law by President Obama. Among other things the act would require Swap dealers and major swap participants to register with either the CFTC or the SEC.

Below I have reprinted press releases from both the House Financial Services Committee and the CFTC.

UPDATE: The Securities Industry Financial and Markets Association (SIFMA) just issued a press release reposted below as well.

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Financial Services Committee Approves Legislation to Regulate Derivatives

Committee completes work on a key element of President Obama’s plan to bring accountability and responsibility to Wall Street

Washington, DC – {The House Financial Services Committee today approved legislation that would, for the first time ever, require the comprehensive regulation of the over-the-counter (OTC) derivatives marketplace. Today’s bill, which was approved by a vote of 43-26, represents a key part of a broader effort by Congress and President Obama to modernize America’s financial regulatory system in response to last year’s financial crisis.

Under the bill, all standardized swap transactions between dealers and large market participants, referred to as “major swap participants,” would have to be cleared and must be traded on an exchange or electronic platform. A major swap participant is defined as anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions creates such significant exposure to others that it requires monitoring. OTC derivatives include swaps, which are contracts that call for an exchange of cash between two counterparties based on an underlying rate, index, credit event or the performance of an asset.

The legislation then sets out parallel regulatory frameworks for the regulation of swap markets, dealers, and major swap participants. Rulemaking authority is held jointly by the Commodity Futures Trading Commission (CFTC), which has jurisdiction over swaps, and the Securities and Exchange Commission (SEC), which has jurisdiction over security-based swaps. The Treasury Department is given the authority to issue final rules if the CFTC and SEC cannot decide on a joint approach within 180 days. Subsequent interpretations of rules must be agreed to jointly by the Commissions.

Description of the Over-the-Counter Derivatives Markets Act of 2009

Clearing

The legislation provides a mechanism to determine which swap transactions are sufficiently standardized that they must be submitted to a clearinghouse. For transactions that are clearable, clearing is a requirement when both counterparties are either dealers or major swap participants. Clearing organizations must seek approval from the appropriate regulator—either the CFTC or the SEC—before a swap or class of swaps can be accepted for clearing.

Transactions in standardized swaps that involve end-users are not required to be cleared. Such customized transactions must, however, be reported to a trade repository.

Mandatory Trading on Exchange or Swap Execution Facility

A standardized and cleared swap transaction where both counterparties are either dealers or major swap participants must either be executed on a board of trade, a national securities exchange or a “swap execution facility”—as defined in the legislation. If none of these venues makes a clearable swap available for trading, the trading requirement would not apply. Counterparties would, however, have to comply with transaction reporting requirements established by the appropriate regulator. The legislation also directs the regulators to eliminate unnecessary obstacles to trading on a board of trade or a national securities exchange.

Registration and Regulation of Swap Dealers and Major Swap Participants

Swap dealers and major swap participants must register with the appropriate Commission and dual registration is required in applicable cases. Capital requirements for swap dealers’ and major swap participants’ positions in cleared swaps must be set at greater than zero. Capital for non-cleared transaction must be set higher than for cleared transactions. The prudential regulators will set capital for banks, while the Commissions will set capital for non-banks at a level that is “as strict or stricter” than that set by the prudential regulators.

The regulators are directed to set margin levels for counterparties in transactions that are not cleared. The regulators are not required to set margin in transaction where one of the counterparties is not a dealer or major swap participant. In cases where an end user is a counterparty to a transaction, any margin requirements must permit the use of non-cash collateral.

Reporting and Public Disclosure of Swap Transactions

Reporting and recordkeeping is required for all over-the-counter derivative transactions. Clearing organizations must provide transaction information to the relevant Commission and a designated trade repository. Swap transactions that are not cleared and for which no trade repository exists, must be reported directly to the relevant Commission. The legislation also provides for public disclosure of aggregate data on swap trading volumes and positions—in a manner that does not disclose the business transactions or market position of any person. Large positions in swaps must also be reported directly to regulators.

Swap Execution Facilities

Swap execution facilities, or facility for the trading of swaps that are not Boards of Trade or National Securities Exchanges, must register with the relevant regulator as a swap execution facility (SEF). SEFs must also adhere to core regulatory principles relating to enforcement, anti-manipulation, monitoring, information collection and conflicts of interest, among others. The CFTC and SEC are required to prescribe joint rules governing the regulation of swap execution facilities. A Commission may exempt a SEF from registration if it is subject to comparable, comprehensive supervision and regulation by another regulator.

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Statement of Chairman Gary Gensler on House Financial Services Committee Passage of OTC Derivatives Regulatory Reform Legislation

October 15, 2009

Washington, DC – U.S. Commodity Futures Trading Commission Chairman Gary Gensler today commented on the OTC Derivatives Markets Act of 2009, passed this morning by the House of Representatives Committee on Financial Services.

Chairman Gensler said:

“Today’s vote by the House Financial Services Committee represents historic progress toward comprehensive regulatory reform of the over-the-counter derivatives marketplace. The Committee’s bill is a significant step toward lowering risk and promoting transparency. Substantive challenges remain. I look forward to building on this Committee’s hard work with Chairman Frank, Chairman Peterson and others in the House and Senate to complete legislation that covers the entire marketplace without exception and to ensure that regulators have appropriate authorities to protect the public.”

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Release Date: October 15, 2009

Contact: Andrew DeSouza, (202) 962-7390, [email protected]

SIFMA’s Bentsen Statement on Committee Passage of Derivatives Regulation

October 15, 2009, Washington, DC—The Securities Industry and Financial Markets Association today released a statement from Ken Bentsen, Executive Vice President, Public Policy and Advocacy in response to the House Financial Services Committee’s passage of the Over-the-Counter Derivatives Markets Act of 2009.

“Bringing greater regulatory transparency and oversight to derivatives markets and products is a key component of reforming our financial system. That oversight must also recognize the important role these risk management tools play for countless companies across the country and for our broader economy. Mandating particular transaction modes, as this bill does, could raise transaction costs while not necessarily reducing risk in a commensurate amount—results that we believe are contrary to our shared reform goals. As the legislative process continues we look forward to working with the Congress toward a bill that strikes a balance between the need for transparency and risk management efficiency.”

The Securities Industry and Financial Markets Association brings together the shared interests of more than 550 securities firms, banks and asset managers. SIFMA’s mission is to promote policies and practices that work to expand and perfect markets, foster the development of new products and services and create efficiencies for member firms, while preserving and enhancing the public’s trust and confidence in the markets and the industry. SIFMA works to represent its members’ interests locally and globally. It has offices in New York, Washington D.C., and London and its associated firm, the Asia Securities Industry and Financial Markets Association, is based in Hong Kong.

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Hedge Fund Investors to Sue SEC

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SEC’s Madoff Failure Cited in Lawsuit

Just a quick note that the New York Times has written an article about two Madoff investors who are suing the SEC for not doing its job. It will likely be a tough case for the investors/plaintiffs to prevail upon because of the doctrine of sovereign immunity (i.e. government agencies cannot be sued for actions made pursuant to their legislative mandate). However, the inspector general’s Madoff report, which in no uncertain terms castigates the SEC, is likely to be the basis of many of the investors’ complaints.

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PPIP and Hedge Fund Closings

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Treasury Announces Closings and Releases Draft LPA

Last week the Treasury announced the initial closing of some funds under the PPIP.

The Treasury also released the draft form of the PPIP Limited Partnership Agreement. The draft LPA is similar to a limited partnership agreement which you would be part of traditional hedge fund offering documents but are unique in a number of ways.

The following press release can be found here.

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October 5, 2009
TG-311

Treasury Department Announces Additional Initial Closings of Legacy Securities Public -Private Investment Funds

WASHINGTON — The U.S. Department of the Treasury today announced three additional initial closings of Public-Private Investment Funds (PPIFs) established under the Legacy Securities Public-Private Investment Program (PPIP). AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC; BlackRock, Inc.; and Wellington Management Company, LLP have completed initial closings, each with at least $500 million of committed equity capital from private investors bringing the total number of initial closings completed to five and total committed equity and debt capital to $12.27 billion.

Small, minority-, and women-owned businesses that are partnering with the fund managers that have completed initial closings include:
Advent Capital Management, LLC
Altura Capital Group, LLC
Utendahl Capital Management

“The PPIP continues to grow,” said Herb Allison, Assistant Secretary for Financial Stability, “Private capital is being drawn into the market for legacy securities and taxpayers are being given a chance to share in the profits.”

Treasury expects that the remaining initial closings for the other PPIFs will occur throughout October. Following an initial closing, each PPIF will have the opportunity for two more closings over the following six months to receive matching Treasury equity and debt financing, with a total Treasury equity and debt investment in all PPIFs equal to $30 billion ($40 billion including private investor capital). Treasury will be providing updates as additional PPIF closings occur.

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IARD Fee Waiver for 2010

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The press release below from NASAA, the representative body of the state securities administrators, announces an IARD (Investment Adviser Registration Depository) fee waiver for next year. The fee waiver will cover both the IARD fees for registering investment advisory firms as well as the fees for individuals. Previously firms had to pay an IARD fee to use the IARD system. Now, firms which are registering as investment advisors for the first time (as well as firms filing investment adviser renewals) will not need to pay any IARD fees. However, firms will still need to pay any applicable state fees.

Chief compliance officers of investment advisory firms should begin getting ready for the IA renewal process which begins in earnest in the beginning to middle of next month. Keep checking in for more information on investment adviser registration and compliance.

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October 13, 2009

NASAA Announces IARD System Fee Waiver

WASHINGTON (October 13, 2009) – The North American Securities Administrators Association (NASAA) today announced it will waive the initial set-up and annual system fees paid by investment adviser firms (IAs) and investment representatives (IARs) to maintain the Investment Adviser Registration Depository (IARD) system.

Denise Voigt Crawford, NASAA President and Texas Securities Commissioner, said, “The IARD system promotes effective and efficient investor protection through readily accessible disclosure of important information to the public while at the same time offering a consistent and streamlined registration process for investment advisers and their representatives. Given the current economic climate, we are pleased that the IARD system’s continued success will allow us to maintain the system fee waivers put in place in 2005 for investment adviser firms and also to fully waive for a second year the system fees paid by investment adviser representatives.”

NASAA’s Board of Directors approved the system fee waiver and will continue to monitor the system’s revenues to determine whether future fee adjustments are warranted.

The IARD system is an Internet-based national database sponsored by NASAA and the SEC and operated by FINRA in its role as a vendor. IARD provides a single nationwide database for the collection and dissemination of information about individuals and firms in the investment advisory field and offers investment advisers and representatives a single source for filing state and federal registration and notice filings. The system contains the employment and disciplinary histories of more than 25,000 investment adviser firms and nearly 250,000 individual investment adviser representatives. IARD system fees are used for user and system support and for enhancements to the system.

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.

For more information:
Bob Webster, Director of Communications
202-737-0900

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Other related articles on investment advisers:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog. Mr. Mallon’s law firm provides registration and compliance services to start up investment advisory firms. If you are interested in starting your investment adviser, please contact us or call Mr. Mallon directly at 415-868-5345.

Raising Hedge Fund Assets | New Market Requires New Strategies

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http://www.hedgefundlawblog.com

As part of our ongoing discussion on how to raise assets for hedge funds, today we have another guest post from Karl Cole-Frieman who specializes in providing legal advice to hedge funds and other alternative asset managers. Mr. Cole-Frieman specializes in Loan Trading and Distressed Debt Transactions, ISDAs, Soft Dollars and Commission Management arrangements, and Wage and Hour Law Matters among other legal matters which hedge fund managers face on a day to day basis.

The article below details the strategies which hedge fund managers should consider when creating a marketing strategy for their fund.

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AWAI Panel: How Growing Funds Can Beat the Odds in the “New” Market

By Karl Cole-Frieman, www.colefrieman.com

On September 24, 2009, we attended a panel organized by the Association of Women in Alternative Investing, and sponsored by Pillsbury Winthrop at Pillsbury’s offices in San Francisco. The panel consisted of several extremely experienced hedge fund professionals and was moderated by Angela Osborne, Senior Director of Global Cash & Derivatives Operations at BGI. Prior to joining BGI, Angela was Head of West Coast Client Service at Morgan Stanley Prime Brokerage.

The other panelists were:

Nicole Civitello, Capital Introduction at BNP Paribas. Nicole was formerly at Bank of America Prime Brokerage in New York and San Francisco (BofA Prime Brokerage was sold to BNP in 2008).
Ildiko Duckor, Counsel at Pillsbury Winthrop. Ildi had previously been Counsel at Howard Rice, and has represented hedge fund managers for many years.
Robin Fink, Head of Prime Brokerage Sales at Jefferies & Company, Inc. Jefferies has been aggressively increasing its market share in prime brokerage, and Robin has been leading that effort on the West Coast.

The panel began with an overview by Ildi Duckor regarding proposed regulatory changes relating to the hedge fund industry.

Develop a Strategic Marketing Plan

The discussion then moved to ideas for successful marketing, and we thought the panel’s insights were useful.

Nicole Civitello emphasized developing a strategic marketing plan. She made the following points about developing a plan:

Targeting the right investors. For example, start up managers should not target corporate pensions and other investors that will require a lengthy track record. Instead, start up managers should look to friends and family investors and family offices for initial capital.
Understanding the investors. Managers should research potential investors the same way they research investment ideas. They can use their personal network or capital introduction resources for help with this. Robin Fink added that managers should do their homework to understand an investor’s strategy.
Invest in CRM software. Managers should invest in customer relationship management software to track investor communications, feedback and follow-up actions.
Increase dialogue with investors. This could be face to face meeting, conference calls, quarterly or monthly letters. Panelists indicated that this is a trend in the industry. Ildi Duckor suggested that conference calls are optimal because they can be well scripted to keep on message.
Dedicated Investor Relations function. Firms that lost assets in the last year often did not have a dedicated investor relations function to communicate with investors.

Portfolio Managers and Marketing

There also was a discussion about whether Portfolio Managers should be the main marketing face to investors. Ildi Duckor emphasized that whoever is before investors should be familiar with both the strategy and the documents. Nicole Civitello noted that many investors want to see the Portfolio Managers early because inevitably there are questions that a marketing person will be unable to answer and, if the Portfolio Manager is not available, the investor will need to have a second meeting. Robin Fink noted that marketing professionals in 2009 need to have an intimate knowledge of the portfolio and a granular understanding of the business. They need to be more than executive secretaries planning trips and meetings.

Due Diligence in the Post-Madoff Environment

Another topic addressed by the panel that is of interest to hedge fund managers is due diligence in the post-Madoff envornment. Nicole Civitello laid out the landscape in 2009:

Longer review period. In the past, investors often made investments after looking at a fund for three to six months. Now the timeline has shifted to six months to a year or longer.
Flows to managers in 2009. Flows in 2009 have generally gone to the following: (a)Funds that outperformed on a relative basis in 2008; (b) Funds previously closed to new investments; and (c) Funds tracked by an investor for several years.
Transparency. It was emphasized by all of the panelists that investors are demanding more transparency.

Ildi Duckor noted a focus on operations by investors, and a movement away from self-administration. The practical effect of this for startup managers is that they will not be able to give management fee concessions because they will need the management fees for increased operational costs.

Angela Osborne also noted that successful hedge fund managers have cohesion between the front and the back offices. Great stock pickers are not necessarily great business managers, and they should be thoughtful in bringing in talent to run the business.

To find out more about marketing issues for hedge fund managers and other topics impacting hedge fund managers, please contact Karl Cole-Frieman of Cole-Frieman & Mallon LLP (www.colefrieman.com) at 415-352-2300 or [email protected].

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Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog. Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. If you are a hedge fund manager who is looking to start a hedge fund or if you are a current hedge fund manager with questions about the laws regarding raising hedge fund assets, please contact us or call Mr. Mallon directly at 415-868-5345. Other related hedge fund law articles include:

Hedge Funds and Insider Trading

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Hedge Fund Manager/Trader Settles Charges with SEC

Insider trading cases pop up every now and again and most cases do not warrant highlighting – post-Boesky everyone in the securities industry is well aware that trading on inside information is illegal. However, it warrants emphasis that the SEC will crack down on hedge fund managers or traders involved with insider trading and the penalties are harsh. The individuals (including a hedge fund manager) involved in the action described in the SEC litigation release reprinted below were subject to fines and disgorgement, of course, but were also barred from the securities industry. The severity of such a penalty underscores the importance of understanding and abiding by the insider trading rules.

As noted below, trading on insider information is illegal under both civil (Section 17(a) of the 1933 act, Section 10(b) of the 1934 act, and Rule 10b-5 thereunder) and criminal laws (generally securities fraud, but depending on the facts charges may also include wire fraud and commercial bribery).

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U.S. Securities and Exchange Commission
Litigation Release No. 21244
October 8, 2009

SEC v. Mitchel S. Guttenberg, Erik R. Franklin, David M. Tavdy, Mark E. Lenowitz, Robert D. Babcock, Andrew A. Srebnik, Ken Okada, David A. Glass, Marc R. Jurman, Randi E. Collotta, Christopher K. Collotta, Q Capital Investment Partners, LP, DSJ International Resources Ltd. (d/b/a Chelsey Capital), and Jasper Capital LLC, C.A. No. 07 CV 1774 (S.D.N.Y) (PKC)

Three Defendants in Wall Street Insider Trading Ring Settle SEC Charges

The Securities and Exchange Commission announced today that on September 29, 2009, the Honorable P. Kevin Castel, United States District Judge for the Southern District of New York, entered final judgments against defendants Erik R. Franklin, Q Capital Investment Partners, LP (“Q Capital”), and David M. Tavdy, in SEC v. Guttenberg, et al., C.A. No. 07 CV 1774 (S.D.N.Y.), an insider trading case the Commission filed on March 1, 2007. The Commission’s complaint alleged illegal insider trading in connection with two related schemes in which Wall Street professionals serially traded on material, nonpublic information tipped by insiders at UBS Securities LLC (“UBS”) and Morgan Stanley & Co., Inc. (“Morgan Stanley”), in exchange for cash kickbacks.

The Commission’s complaint alleged that from 2001 through 2006, Mitchel S. Guttenberg, an executive director in the equity research department of UBS, illegally tipped material, nonpublic information concerning upcoming UBS analyst upgrades and downgrades to two Wall Street traders, Franklin and Tavdy, in exchange for sharing in the illicit profits from their trading on that information. The complaint also alleged that Franklin was a downstream tippee in another scheme in which, in 2005 and 2006, Randi Collotta, an attorney who worked in the global compliance department of Morgan Stanley, illegally tipped material, nonpublic information concerning upcoming corporate acquisitions involving Morgan Stanley’s investment banking clients.

The complaint alleged that Franklin illegally traded on the inside information for two hedge funds he managed, Lyford Cay Capital, LP and Q Capital, and in his personal accounts. Tavdy illegally traded on the inside information (i) for Andover Brokerage, LLC and Assent LLC, registered broker-dealers where Tavdy was a proprietary trader, (ii) in his own personal account, (iii) in the accounts of a relative and friend, and (iv) in the accounts of Jasper Capital LLC, a day-trading firm with which Tavdy was associated. Franklin and Tavdy also had downstream tippees who traded on the inside information. Without admitting or denying the allegations in the complaint, Franklin, Q Capital, and Tavdy settled the Commission’s insider trading charges.

Franklin and Q Capital consented to the entry of a final judgment which (i) permanently enjoins them from violating Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933 (“Securities Act”); and (ii) orders, on a joint and several liability basis, disgorgement of $5,400,000, with all but $290,000 waived based on a demonstrated inability to pay. In a related administrative proceeding, Franklin consented to the entry of a Commission order barring him from future association with any broker, dealer, or investment adviser. In a parallel criminal case, Franklin previously pled guilty to charges of securities fraud and conspiracy to commit securities fraud and is awaiting sentencing. U.S. v. Erik Franklin, No. 1:07-CR-164 (S.D.N.Y.).

Tavdy consented to the entry of a final judgment which (i) permanently enjoins him from violating Section 10(b) of the Exchange Act, Rule 10b-5 thereunder, and Section 17(a) of the Securities Act; and (ii) orders him to pay disgorgement of $10,300,000. In a related administrative proceeding, Tavdy consented to the entry of a Commission order barring him from future association with any broker or dealer. In a parallel criminal case, Tavdy previously pled guilty to charges of securities fraud and conspiracy to commit securities fraud, and was sentenced to 63 months in prison. U.S. v. Mitchel Guttenberg and David Tavdy, No. 1:07-CR-141 (S.D.N.Y.).

The Commission also announced that Samuel W. Childs, Jr., a former general securities principal at Assent LLC, consented to a Commission order barring him from future association with any broker or dealer, based on his criminal conviction for conspiracy to commit securities fraud, wire fraud and commercial bribery. U.S. v. Samuel W. Childs, Jr. and Laurence McKeever, No. 1:07-CR-142 (S.D.N.Y.). In that case, the criminal indictment alleged that Childs accepted bribes from traders at Assent LLC in exchange for not reporting their illegal trading to Assent management.

The Commission acknowledges the assistance and cooperation of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

For further information, see Litigation Release Nos. 20022 (March 1, 2007), 20367 (November 20, 2007), 20725 (September 18, 2008), and 21086 (June 16, 2009).

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San Francisco Hedge Fund Industry Event

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BAHR Panel Discussion on Global Investing Trends
By Bart Mallon of Cole-Frieman & Mallon LLP

The Bay Area Hedge Fund Roundtable convened again today at the Sens Restaurant in San Francisco to discuss the global investing trends and how those trends are affecting the hedge fund industry. The presentation was moderated by Ron Resnick (ConselWorks LLC) and included the following panel participants:

John Burbank (Passport Capital LLC)
John Shearman (Albourne America, LLC)
Matt Kratter (Kratter Capital LLC)
Patrick Wolff (Clarium Capital Management, LLC)

Overall the panel discussion was very interesting and I think that Ron did a very good job of moderating in a kind of “Meet the Press” type of way. The speakers all had interesting viewpoints and were able to keep the audience interested in the topics. Below I will give a very high level run-down of the major topics discussed – if anything does not make sense, it is likely a mistake in my hearing so please do not hold that against any of the speakers.

Additional note: this is not in any way an advertisement for any hedge fund and is not an offering of any interests in a hedge fund. I have never talked to any of the named speakers and everything I am writing below is on my own volition.*

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John Burbank

The discussion was started when Ron asked John was his fund was investing in. John said that he is now investing in the United States in the same stuff as he was before. However, he spent a good deal of time discussing liquidity and how it will affect investment decisions going forward. Central to his discussion were his views on deflation. He ended this part of the discussion by noting that governments (especially the U.S. government) has so many tools to effect the financial markets (in addition to simply printing money) and that many actions are driven by the current liquidity situation.

Matt Kratter

I infer that Matt started his own hedge fund last year because he was asked whether it was a good or a bad time to start a hedge fund within the last twelve months. He noted that it was not the best time to be on your own but that the times serve as a good proving ground that a manager can withstand market downslides. Matt talked about variability of inflation going forward and that he is currently net short. He thinks that multiples are likely to retract in the future.

John Shearman

John was asked whether investor’s hedge fund expectations have changed. He said that investor expectations have come down a bit, but beleives that the forcase for the future has never been better. Post 2008 he sees that there has been a shifting of power back to hedge fund investors and he mentioned two buzzwords – lower fees and transparency. While fees have not really come down recently, there have been huge gains made in expectations of transparency. This is especially true with regard to valuation and verification of assets. Hedge funds have made these changes and it is relatively easy for them to say yes to such requests (as opposed to requests for fee decreases).

John seemed to indicate that there is more opportunity for investors to come together and present a united front with regard to what they want to see in these vehicles, but it has just not happened. A central reason is that foundations and endowments (two of the largest groups of hedge fund investors) are not really in a position to be an agent of change because they are examining the funds they are already invested in. He also mentioned a general increase in separately managed accounts noting that the central driving force is the investor’s need for control of assets – liquidity without conditions.

Patrick Wolff

Patrick was asked point blank while his group did not do as well this year. He said that, unfortunately, they had the wrong investments this year and that the drawdown was not a result of their risk management policies and procedures. Patrick talked about macro themes including China, volitility, carry trades over the last year and the fundamentals of major government players (centrally China and the U.S.). He feels there is a current bubble in China which is likely to last in the near term. He thought that a major macro issue moving forward will be how the governments will continue to be involved in the credit markets. Patrick believes that the U.S. has huge off balance sheet liabilities.

Other Question and Answers

What are the major trends moving forward?

John Burbank – governments changing the rules of the game as it is being played. What is going to happen will be driven by governments subject to: the price of the dollar, commodities, or China.

Why did gold hit an all-time high today?

Matt Kratter – I don’t know, but this is a question which everyone is asking – even the garbageman.

How is capital flowing?

John Shearman – there are a lot of opportunities in hedge funds – lots of alpha and distressed assets. Macro discretionary is a good play right now and there is a lot of interest in commodities.

How is fund raising in this environment?

Matt Kratter – fundraising has been slow since last year but there is more activity at the margins. Fundraising will probably stay difficult for awhile.

Are investors more interested in the investment side or infrastructure side during due diligence conversations?

John Burbank – all investor due diligence is taking longer. Current investors are coming back and asking questions they should have asked earlier. It is now similar to 2003 – there is a lot of excitement. Which makes sense because investors essentially have three choices: mutual funds, do-it-yourself, or hedge funds.

[Someone mentioned that capital is not there for a start up and the question arose as to whether two guys and a Bloomberg really had a chance to raise capital in this environment. John said that start up managers should not be afraid to start out small – he started with about $1MM in AUM and slowly grew to $12MM after three years (his firm now manages over $2 billion). John emphasized that over time good managers will be able to demonstrate their strategy and if the numbers are good, investors will eventually find such managers.]

What about hedge fund regulation?

Patrick Wolff – over hedge fund regulation is not a huge deal. If you are registering with the SEC you are going to be required to do things that, as a good business, you should be doing anyway. The key to regulation is that it needs to be sensible. Regulation itself is not bad.

Questions from the audience

When Ron asked the audience if there were any questions there was a long pause. I eventually asked the panel what they thought about the headlines recently regarding the U.S. dollar and whether it would remain the world’s reserve currency. Patrick responded first that worry about the dollar is overhyped. However, he did note that his fund has had some investors request share classes in a different currency.** John noted the practical limitations of moving toward another currency and noted that if a government needs to get a billion U.S. dollars it can happen, but that wouldn’t be the case with other currencies.

Note on People Who I Met

After the panel there was time to discuss the presentation and do some networking. I had the distinct pleasure of talking with a number of people at the event, including:

Jenny West of Probitas Partners (fund placement services)
Mason Snyder of Catalina Partners (risk advisory to investment management industry)
Rosemary Fanelli of CounselWorks (regulatory consulting for financial institutions)
Ron Resnick of CounselWorks(regulatory consulting for financial institutions)
Maria Hall of M.D. Hall & Company (CPA services for small funds)

* If you are a named speaker and would like your name and information taken out of this article, please contact me.

** I am in the process of writing an article on this topic – if you are a hedge fund manager who wants to create another class of fund interests denominated in another currency, please feel free to contact me to discuss.

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Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog and has written most all of the articles which appear on this website. Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. If you are a hedge fund manager who is looking to start a hedge fund or register as an investment advisor, please contact us or call Mr. Mallon directly at 415-868-5345. Other related hedge fund law articles include: