Enforcement and Liability Risks for Hedge Funds Trading in the United States

During the past two years, the financial markets have suffered from unprecedented volatility, both with respect to market performance and regulatory and civil legal actions. This market instability led to the adoption of the Dodd-Frank Act in the United States, which, among other things, subjects private funds to registration with, and increased regulation by, the SEC. In addition, all participants in the financial markets, including hedge funds, are receiving greater and harsher scrutiny from the regulatory bodies in Europe and the United States, not only via the promulgation of new regulatory requirements, but also as a result of more searching enforcement investigations and actions.

There are two areas of enforcement activity that have particular relevance for the trading activities pursued by hedge funds arising out of the heightened attention given to funds’ exchange of information with each other and other market participants.

The Galleon indictment and insider trading

• Illicit acquisition of nonpublic information
• Web of sources
• Absence of internal controls

Short selling conspiracies

• Claims of conspiracies to manipulate the price of a security
• Sharing of trading strategies and timing
• Biovail and Fairfax Financial lawsuits
• Third Point SEC investigation

H. Peter Haveles, Jr., Chair of Kaye Scholer’s Financial Services Litigation group and Co-Chair of its Complex Commercial Litigation Department, led a discussion of these areas of enforcement and how they affect funds managed from the UK. Simon Firth, London Investment Funds Partner, considered the impact of the Dodd-Frank Act on those funds’ activities.

The Investment Funds Group of Kaye Scholer LLP holds regular breakfast seminars in our London office usually on the first Tuesday of every month. These seminars address current topics of interest to private equity and venture capital firms, hedge fund managers, fund-of-funds and traditional investment management firms.