CTA Expo 2009

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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CTA and CPO Registration and Compliance Guide

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Practical guidance for CTA and CPO firms

Commodity Trading Advisors (CTAs) and Commodity Pool Operators (CPOs) have been contacting me with greater regularity and we have decided to provide those firms with more detailed information on their registration and compliance requirements. Over the course of the next few weeks we will be continually updating this page with more legal and business guidance for CTAs and CPOs. Specifically, we will be providing information on the following topics:

CTA and CPO Registration – this article discusses the how-to’s of registration with the CFTC. The article details the general requirements for firms, principals, and associated persons. Included in this discussion is information on CTA/CPO exam requirements and an overview of the registration process through the NFA’s electronic registration system.

CTA and CPO Registration Exemptions – while the Commodities Exchange Act will generally require CTA and CPO firms to register with the CFTC, there are some important exemptions from the registration provisions. Review this article to see if your firm might be able to claim an exemption from the registration provisions.

CTA and CPO Compliance Overview – CTAs and CPOs are subject to a number of laws, regulations and rules. Not only must CTAs and CPOs follow CFTC laws and regulations, but as Members of the NFA, these groups must also follow all of the rules developed by the NFA. We will be discussing compliance best practices, major examination issues, major deadlines and the CTA/CPO compliance manual. Being prepared for an NFA examination is of great importance.

Recent NFA Actions against CTA and CPO Managers – the NFA and the CFTC have been quite active lately. In this article we will be discussing some of the most recent actions against NFA member firms. This article will also provide common-sense advice on what managers can do the protect themselves from examination deficiencies.

Important NFA Rules for CTA and CPO Firms – there are a number of rules which the NFA has regarding the conduct of CTAs and CPOs. In general CTAs and CPOs must hold themselves out with the utmost professionalism. This article will detail this and other important NFA rules.

CTA and CPO advertising – there are a number of important rules regarding advertising for CTAs and CPOs. CPOs, especially, must be careful about advertising because of the restrictions under Rule 506 of Regulation D, an exemption that many CPOs utilize in offering their fund interests. Websites will be touched upon in this post and will also be discussed in greater depth in a subsequent posting.

CTA and CPO websites – many CTA firms utilize the internet to advertise their services. CPO firms will also sometimes have a (minimal) internet presence. This article will detail the considerations that both CTA and CPO firms face when creating and maintaining an internet presence and how to deal with internet based inquiries from potential investors.

NFA Exam Requirements for CTAs and CPOs – individuals of NFA member firms will generally need to have a Series 3 exam license and potentially a Series 30 exam. Some individuals may need to have a Series 31 exam license and, potentially in the future, forex CTAs and CPOs will need to have a Series 34 exam license. This article will discuss these exams and the process an individual will go through in order to register to take the exams.

CTA Expo Blog – the unofficial blog of the CTA Expo most recently held in October of 2009. Information for CTA managers on business, legal and compliance issues. Included is a directory of CTA firms and service providers.

Forex CTAs and CPOs – the regulatory light has been focused on retail spot forex managers recently. Read this article to get up to speed on recent CFTC and NFA pronouncements regarding this area of the industry. We will also provide information on Forex IBs and Forex FCMs.

In addition to the above topics we are hoping to add others over time. We welcome all feedback and encourage you to leave comments below. We will also attempt to answer CTA and CPO frequently asked questions.

If you are a manager or firm that needs to register as a CTA or CPO, or if you are contemplating registration, please contact Bart Mallon, Esq. of Cole-Frieman & Mallon LLP at 415-868-5345.

Hedge Fund Investors to Sue SEC

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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Other related hedge fund law articles include:

IARD Fee Waiver for 2010

Raising Hedge Fund Assets | New Market Requires New Strategies

Hedge Fund Regulation IT Solutions

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Technology Solutions for Registered Hedge Fund Managers

http://www.hedgefundlawblog.com

It is the final quarter of this year’s political season and it has become clear that the earlier clamor for hedge fund registration has been overshadowed by larger political issues – namely health care legislation and the cap and trade bill. Recent events, however, have shown that the registration issue is not dead and the venture capital industry has been able to potentially secure an exemption from the registration provisions. Even though we don’t know where regulation will take us in the next 6 to 18 months, it is likely that many hedge fund managers will need to institute compliance and IT programs as a result of forthcoming laws and regulations.

The article below, submitted by Meyer Ben-Reuven, CEO of Chelsea Technologies, details some issues which managers will need to be ready to handle once legislation and regulations go into effect. State registered investment advisors should take note as they may already be required (under state law) to maintain such compliance programs.

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How is President Obama’s New Hedge Fund Regulation Plan affecting you?
By Meyer Ben-Reuven, CEO Chelsea Technologies

The challenging question Hedge Fund Managers should ask themselves is what should they be doing to be compliant with President Obama’s Hedge Fund Regulation Plan? There are many questions and many tasks to accomplish, but most important is to understand the main points of the plan, what needs to be done and what are the costs associated. In this paper I present you with a summary of the President’s plan and what a Chief Compliance Officer needs to face in conjunction with the IT department to be compliant with regulations. Costs are important, but I will keep them away from this paper.

Obama’s New Hedge Fund Regulation Plan

In June 2009, President Obama presented a proposal for new regulations that affect Hedge Funds and fund managers. The most important part of this new regulation will be to require Hedge Fund, Private Equity, and VC Fund Managers to register with the SEC as investment advisors.

Although it is a proposal, all fund managers will have to start thinking about the re-registration and the process to keep the fund compliant.

The plan’s 5 main goals are:

Promote robust supervision and regulation of financial firms.
Establish comprehensive supervision and regulation of financial markets.
Propose comprehensive regulation of all OTC derivatives.
Protect customers and investors from financial abuse.
Raise international regulatory standards and improve international cooperation.

The idea is to require advisers to report financial information on their fund and its management and thus have the ability to assess whether the fund poses a threat to the stability of the financial system and at the same time strengthen investor protection.

The specific goals regarding hedge funds are as follows:

Data collection
SEC should conduct regular, periodic examinations of hedge funds
Reporting AUM and other fund metrics to the SEC
SEC would have ability to assess whether the fund or fund family is so large, highly leveraged, or interconnected that it poses a threat to financial stability

How will IT Departments have to help keep the funds within regulation rules?

As of February 2006, Hedge Fund Advisors were obliged to comply with SEC Rule 203(b)(3)-2 requiring registration under the Investment Advisor Act. Under these rules, the Hedge Funds were advised to retain all internal and external email and IM business communications. In June 2006, the Goldstein ruling against the SEC pushed several funds to de-register. With the failure of the financial system since the end of 2007, the new administration has been poised to regulate the industry more than ever.

What needs to be done?

Take a look at all the ways communications are conducted in the fund
What are the devices used to communicate
Always be on the lookout for new technologies

Afterwards, insure you have control over the different communication methods. As stated, all electronic communication in and out of the fund has to be retained for future review. This means that if it cannot be controlled and retained, it must be prohibited.

All internal rules have to be specified in IT policies and procedures, otherwise no one can be held accountable.

The following is how data needs to be archived for SEC purpose audits:

Incoming/Outgoing Data must be kept in its original form
Data has to be easily retrievable and searchable
Data has to have a date and time stamp
Data has to be retained in the main office for first 2 years
Data has to be retained for 5 years
Data has to be put into tamper proof media (meaning non-rewritable and non-erasable)
Data has to be stored in a secondary backup location (preferably away from the same grid)
Be able to produce data promptly (within hours)
Be able to provide data in its original format in either view or print form
Implement annual review of the system

It is highly recommended that data be tested for integrity including testing retrieval and searching, as well as accuracy. The test should be conducted on a yearly basis, but better if on a more frequent basis.
Although the IT department is in charge of conducting the process, it is ultimately the Chief Compliance Officer who is responsible for this area. The Chief Compliance Officer needs to dictate the test frequency as well as to advise everyone in the firm about the policies and make sure everyone understands the consequences of failure to comply.

All these internal policies have to be in writing and any violations have to be documented and fixed. The regular testing and reviews have to be documented and be ready for presentation in case of an audit.

NOTE: TAPE BACKUP IS NOT A SUBSTITUTE FOR MESSAGE ARCHIVING

What are the different communication venues that exist and can be controlled and thus archived?

Email and IM from Exchange
Email and IM from Bloomberg and Reuters
Blackberry archiving of Pin-to-Pin , SMS, Call Detail logs
E-Faxes
Blogs
Chat Rooms
Message Boards
Twitter
Facebook
LinkedIn

Since all of the above require certain technologies and software for archiving and retaining, you have to make an effort to comply with the regulations or otherwise prohibit the usage of such technologies in the work place.

How do you implement compliance?

There are two schools of thought to achieve compliance:

Build an in-house system
Use a third party system

The in-house system is more complex and often requires a larger upfront investment to build and maintain. Keep in mind you will have to have the following:

Servers, storage, and software
Backup Servers, storage, and software in a location out of the main location grid
Replication system
Maintain both the main and backup location

The responsibility and costs can escalate, but depending on the size of the firm, it might be the most cost efficient.

The third party systems, which have built an infrastructure that is scalable, keep on growing as more clients join their list. The time to implement is a fraction of building an in-house system. Depending on the third party provider, there are several ways of getting the data:

Have the data arrive to the email server and from there delivered to the third party provider
Have the data arrive to the third party provider and then to the email server

Both methods of delivery have issues of their own. The first method requires you to be diligent about monitoring the email flow and ensure data is routed to the archiving provider – the responsibility is shifted completely to you. The second method, where the provider requires the email to be routed through their system before it arrives to your server, usually poses a different challenge where emails might get delayed at the provider.

If you decide on any of the above systems, you should try to utilize an external anti-spam solution to keep your storage usage to a minimum as well as to make sure that non-account emails do not reach your email server. These measures will keep all spam from being part of your retention data.

References and information used from the following sources: Global Relay, Zantaz, LiveOffice, NextPage, Hedge Fund Law Blog

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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 ERISA, please contact us or call Mr. Mallon directly at 415-868-5345. Other related hedge fund law articles include:

Purchasing an ERISA Fidelity Bond

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Information on How to Buy ERISA Bond

Purchasing an ERISA Fidelity Bond is essentially the same as purchasing a fidelity bond for an investment advisory firm and this article is meant to serve as guide as to cost and timing to secure one of these bonds.

Overview

Generally a manager will need to make sure that the bond is for 10% of the amount of the ERISA assets (subject to a minimum bond requirement of $1,000). This means that if the ERISA assets in the fund are $1MM, the manager will need to have a bond for at least $100,000.

However, the maximum bond amount with regard to any one plan is $500,000. This means that if the manager has ERISA assets in the fund (from one plan) of $6MM, the manager will only need to have a bond in the amount of $500,000 with respect to that plan.

Generally, if the manager had two plans in his fund – one with $6MM in assets and one with $2MM in assets, the manager would need to have $700,000 worth of coverage ($500,000 and $200,000 respectively). The best way to accomplish this is to have separate bonds for the separate ERISA plans invested in the fund.

Cost of ERISA Bond

A bond consultant or insurance broker will generally be able to provide a quote for the ERISA coverage needs. The costs are fairly reasonable – generally around $200 to $400 for every $100,000 of coverage per year. For newly formed management companies, the amount of the bond may be based on the personal credit score of an officer of such management company.

Application Process and Timing

ERISA bonds are fairly easy to purchase and can be delivered quickly. The application process is generally pretty basic – applications will require basic information about the management company, the fund and/or the officer(s) of the management company. Different bond companies will require different information or have different application processes or procedures.

In my experience, managers have been able to secure a bond within about a week of submitting an application. If you are a manager that is likely to receive an allocation from an ERISA plan, the best practice is to have the bond in place prior to the time that the ERISA assets are wired to the fund account. Accordingly, the manager should take care to make sure the bonding company has all necessary information in order to place the bond by the necessary time.

Other Notes

As with other sensitive areas of hedge fund law (like taxation) managers should take extra care when dealing with ERISA investors and ERISA requirements. I always recommend discussing any ERISA issues with an ERISA specialist.

Please also see our disclaimer with regard to the information presented on this website.

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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 ERISA, 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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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 securities laws, please contact us or call Mr. Mallon directly at 415-868-5345. Other related hedge fund law articles include: