Category Archives: Hedge Funds

Billions: Real-Life Applications of Scenarios Depicted on the Show – Recusal


In this week’s Billions episode entitled, The Good Life, U.S. Attorney Chuck Rhoades is ready to go after Axe Capital. We are taking a look at how that transpires despite a conflict of interest and lack of recusal.

Continue reading

Leave a comment

Filed under Hedge Funds, Investment Advisers

New York High Court Rejects Unlawful Termination Claim by Hedge Fund Compliance Officer

On Wednesday, New York’s highest court rejected a claim by the former Chief Compliance Officer of Peconic Partners, LLC – a New York based hedge fund – that he was wrongfully terminated for confronting the fund’s majority owner, CEO and President, William Harnisch, for front-running. Sullivan v. Harnisch, et al., No. 82, NYLJ 1202552974182, at *1 (Ct. of App., Decided May 8, 2012). The complaint filed by the CCO, Joseph Sullivan, alleges he was terminated within days of objecting to sales by Harnisch in his personal account and the accounts of his family members in Potash Corp. (POT) the day before selling shares of the stock in the hedge fund’s accounts. The court noted that Sullivan, as CCO, had a duty to ensure that Peconic followed its legal and ethical obligation under state and federal securities laws, as well as its own Code of Ethics, to avoid such conduct. Notably, the court found that those “legal and ethical duties of a securities firm and its compliance officer [do not justify the recognition] of a cause of action for damages when the compliance officer is fired for objecting to misconduct.” An important factor in the reaching this decision seemed to be the fact that Sullivan was not a full-time compliance officer; rather, he held four other titles at the firm, including Executive Vice President and Chief Operating Officer.

The high court also noted the limits of the recent protections afforded whistleblowers under the Dodd-Frank Act, stating a “private right of action for double-back pay for employees who are fired for furnishing information about violations of the securities laws to the SEC,” and no private right of action for termination that results in reporting violations internally. The opinion’s author, Hon. Robert S. Smith, Jr., stated Dodd-Frank “does not apply to conduct like that alleged in Sullivan’s complaint; Sullivan does not claim to have blown a whistle…but only to have confronted Harnisch himself. Nothing in federal law persuades us that we should change our own law to create a remedy where Congress did not.”

Two of the court’s seven judges, included the court’s Chief Judge, Hon. Jonathan Lippman, disagreed with the ruling. Judge Lippman’s scathing dissenting opinion observed:  “The majority’s conclusion that an investment adviser like defendant Peconic has every right to fire its compliance officer, simply for doing his job, flies in the face of what we have learned from the Madoff debacle, runs counter to the letter and spirit of this Court’s precedent, and facilitates the perpetration of frauds on the public.”

For additional information about the Sullivan case or any other securities compliance concern please contact the author, Sarah Weber at or (619)298-2880.

Leave a comment

Filed under Hedge Funds

SEC Focuses on Suspicious Hedge Fund Performance to Identify Potential Fraud

On December 1, the SEC announced enforcement actions against three advisory firms and six individuals as part of the Commission’s new initiative whereby the Commission’s Asset Management Unit uses proprietary risk analytics to evaluate hedge fund returns. Performance that appears inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further scrutiny. The enforcement actions allege that the firms and managers engaged in a wide variety of illegal practices in the management of hedge funds or private pooled investment vehicles, including fraudulent valuation of portfolio holdings, misuse of fund assets, and misrepresentations to investors about critical attributes such as performance, assets, liquidity, investment strategy, valuation procedures, and conflicts of interest.

The enforcement action filed against ThinkStrategy Capital Management LLC is particularly instructive.  In this action, the SEC charged the New York-based firm and its managing director with fraud in connection with two hedge funds they managed. At its peak, ThinkStrategy reportedly managed approximately $520 million in assets.  However, the SEC’s complaint filed on Nov. 9, 2011 alleges that ThinkStrategy engaged in a pattern of deceptive conduct designed to bolster the funds’ track record, size, and credentials.  Specifically, the SEC alleges that ThinkStrategy materially overstated the funds’ performance and gave investors the false impression that their returns were consistently positive and minimally volatile.  ThinkStrategy also allegedly inflated the funds’ assets, exaggerated the firm’s longevity and performance history, and misrepresented the size and credentials of firm’s management team.

Given the new information the SEC will acquire through Form PF, we can expect to see increased regulatory scrutiny against private fund managers rooted in suspiciously inflated performance returns.

For additional information please contact us at or at (619) 298-2880.

1 Comment

Filed under Hedge Funds

SEC Whistleblower Program Now In Effect

With its new whistleblower program officially becoming effective on August 12, 2011, the SEC launched a new webpage for people to report violations of the federal securities laws and apply for a financial award.

Prior to the enactment of the Dodd-Frank Act, the SEC only had authority to reward whistleblowers in insider trading cases. Now, the Dodd-Frank Act provides the SEC with the authority to pay financial rewards to whistleblowers who provide new and timely information about any securities law violation. Among other things, whistleblowers who provide original evidence of securities laws violations may be eligible to receive between 10% -30% of recovered funds if the information results in the recovery of at least $1 million.

Under the newly implemented program, whistleblowers may be employees or outsiders of the entity that they provide relevant information on. If the whistleblower is an employee of the firm, the Dodd-Frank Act provides for anti-retaliation provisions to protect these employees from the possibility of employer reprisals.  In light of the fact that employees may be incentivized to circumvent internal reporting chains, investment advisers, private fund managers, broker-dealers and other entities subject to the SEC’s rules should consider the following tips to increase the likelihood that possible violations are reported early and internally:

  • Create an environment of compliance that begins with a tone at the top;
  • Continuously train employees on regulatory compliance;
  • Establish an anonymous reporting hotline;
  • Maintain the confidence of those who report possible violations; and
  • Consult with counsel to determine the advisability of self-reporting discovered violations.

For more information, please contact Brent Cunningham, Associate Attorney, at 619.298.2880 or at


Leave a comment

Filed under Broker-Dealers, Hedge Funds, Insider Trading, Investment Advisers

Massachusetts Adopts New Regulations Governing Use of Expert Networks

Beginning December 1st of this year hedge fund managers, private equity firms and investment advisers doing business in Massachusetts will need to have policies and procedures in place to address that state’s new regulations aimed at overseeing the use of expert network firms. Expert networks are intended to connect institutional investors, hedge funds, investment advisers and others with industry specialists and consultants, helping them gather data to make investment decisions.  The adoption of these regulations makes Massachusetts the first state in the Union to have rules overseeing these relationships.

Under Massachusetts’ newly adopted regulation, investment advisers, hedge funds and other entities that make use of expert networks will be required to certify that the expert network will not, and does not supply confidential information as part of its services.  Entities that use expert networks will also be required to describe the confidentiality and non-disclosure arrangements that govern their relationship with the expert networks.

The adoption of this new regulation is designed to thwart perceived abuses by hedge fund managers and investment advisers who gain and trade on inside information through the use of these expert networks.  Indeed, recent high profile insider trading cases have involved the misuse of expert networks.  For instance, Raj Rajaratnam, founder of the now defunct New York-based hedge fund Galleon Group, faces more than twenty years in prison for his recent conviction on insider trading charges that stemmed from his misuse of expert networks.

While the new regulation may not deter those bent on gaining and trading on insider information, it does put these individuals on notice and may serve as a tool regulators will use to initiate enforcement proceedings.

For more information, please contact Brent Cunningham, Associate Attorney, at 619.298.2880 or at

Leave a comment

Filed under Hedge Funds, Insider Trading, Investment Advisers

Considerations for Structuring Finders Arrangements

Hedge funds, private equity funds, venture capital funds and other types of private funds commonly utilize third parties to promote their funds and raise capital from potential investors.  These third parties are commonly referred to as “finders.”  When entering into arrangements with finders, private fund managers should carefully consider the structure of this relationship, particularly if the finder is not a registered representative.  Increasingly, the SEC and FINRA are focusing on whether or not a finder is acting in the capacity of an unregistered broker.  Section 15 of the Securities Exchange Act of 1934, as amended, defines a “broker” as any person engaged in the business of effecting transactions in securities.  As the term “effecting transactions in securities” is open to interpretation, the SEC has added some clarity to this term through a myriad of SEC No-Action Letters and enforcement actions.  Factors the SEC uses to determine whether a finder is really acting as an unregistered broker include:

  • Whether the finder provided advice to potential investors regarding the merits of the investment;
  • Whether the finder played a material role in the negotiation of the terms of the investment;
  • Whether the finder has a history of involvement in the sale of securities; and
  • Whether the finder received transaction-related compensation based in whole or in part on the success or amount of the investment.

Finders play a critical role.  However, it is important to work closely with legal counsel to structure the arrangement to comply with these various regulatory considerations.

For more information, please contact Brent Cunningham, Associate Attorney, at 619.298.2880 or at

1 Comment

Filed under Hedge Funds