United States: Hedge Fund Report - Summary Of Key Developments - Fall 2012

This continues to be a time of rapid change for the hedge fund industry, as the Securities and Exchange Commission (the "SEC"), the Commodity Futures Trading Commission (the "CFTC"), and various other regulatory agencies, including the Federal Reserve Board (the "Federal Reserve") and the Department of the Treasury (the "Treasury"), continue to propose and finalize rules to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). There have also been a number of significant developments in the hedge fund tax area, and the SEC and private plaintiffs have continued to bring enforcement actions and litigation involving hedge funds and other types of private investment funds and fund managers.

This Report provides an update since our last Hedge Fund Report in Spring 2012 and highlights recent regulatory and tax developments, as well as recent civil litigation and enforcement actions as they relate to the hedge fund industry. Paul Hastings attorneys are available to answer your questions on these and any other developments affecting hedge funds and their investors and advisers.


A. Dodd-Frank Rulemaking

The following is the status of various proposed and final rules and regulations implementing the Dodd-Frank Act that are most relevant to the hedge fund industry.

1. Federal Reserve Clarifies Volcker Rule Conformance Period

On April 19, 2012, the Federal Reserve issued a statement clarifying the duration of the conformance period for Section 619 of the Dodd-Frank Act, also known as the "Volcker Rule." The Volcker Rule generally prohibits a banking entity from (i) engaging in short-term proprietary trading of any security, derivative and certain other financial instruments for the banking entity's own account; or (ii) owning, sponsoring or having certain relationships with a hedge fund or private equity fund. The Dodd-Frank Act requires the Federal Reserve to adopt rules regarding the conformance periods for activities and investments covered by the Volcker Rule, which it did in a final rule dated February 9, 2011 (the "Conformance Rule"). The Federal Reserve's statement confirms that the Conformance Rule grants entities covered by the Volcker Rule the full two-year period after the Volcker Rule's July 21, 2012 statutory effective date (i.e., until July 21, 2014) fully to conform their activities and investments to the Volcker Rule, unless the period is further extended by the Federal Reserve. Additional information on the Federal Reserve's statement is available here. A final rule implementing the Volcker Rule is still pending, despite increased pressure from legislators to finalize the implementing regulations.1

2. SEC and CFTC Adopt Joint Final Rules Defining "Swap," "Security-Based Swap" and "Security-Based Swap Agreement"

On August 13, 2012 the SEC and the CFTC (collectively, the "Agencies") issued joint final rules clarifying the definitions of "swaps" and "security-based swaps" under Title VII of the Dodd-Frank Act ("Title VII"). Title VII established a new regulatory framework for oversight by the CFTC of swaps, by the SEC of security-based swaps, and jointly, by the Agencies, of mixed swaps. Title VII defined "swaps," "security-based swaps" and "security-based swap agreements" for the purposes of the Dodd-Frank Act and mandated that the Agencies issue rules to define further the terms.

The Agencies, through the joint final rules, further clarified the treatment under these definitions of certain types of agreements, contracts and transactions. Under the joint final rules, certain foreign exchange products, foreign exchange forwards, foreign exchange swaps and forward rate agreements are defined as swaps, while certain insurance products, commercial agreements, contracts and transactions involving customary business arrangements are excluded from the definition of swaps. The joint final rules became effective on October 12, 2012.

As discussed in our last Report, effective December 31, 2012, the CFTC rescinded the exemption from registration as commodity pool operators ("CPOs") under CFTC Rule 4.13(a)(4), commonly relied upon by certain private fund advisers. Private fund advisers should review the definitions in the joint final rules to determine their eligibility for the exemption from CPO registration under CFTC Rule 4.13(a)(3) (the de minimis exemption), and will have until December 31, 2012 to file a notice of exemption or to register with the CFTC as CPOs. On August 14, 2012 the CFTC Division of Swap Dealer and Intermediary Oversight released responses to frequently asked questions ("FAQs") regarding CPO compliance obligations. Additional information on the Agencies' joint final rules is available here and the FAQs are available here.

3. SEC's Proposed Rules for Security-Based Swap Dealers and Major Security-Based Swap Participants

On October 17, 2012 the SEC voted unanimously to propose rules creating capital, margin and segregation requirements for security-based swap dealers ("SBSDs") and major security-based swap participants ("MSBSPs") subject to SEC jurisdiction, as required by Title VII of the Dodd-Frank Act. The proposed rules (i) set minimum capital requirements for SBSDs (proposed Rule 18a-1 and Rule 15c3-1 amendments) and MSBSPs (proposed Rule 18a-2) (the "Minimum Capital Rule"); (ii) establish margin requirements for SBSDs and MSBSPs with respect to non-cleared security-based swaps (proposed Rule 18a-3) (the "Margin Rule"); and (iii) establish segregation requirements for SBSDs and notification requirements with respect to segregation for SBSDs and MSBSPs (proposed Rule 18a-4) (the "Segregation Rule").

The Minimum Capital Rule would subject all SBSDs to a fixed dollar capital minimum (generally, $20 million) plus an additional amount equal to eight percent (8%) of the margin required for cleared and non-cleared security-based swaps. The Margin Rule would require SBSDs, in the absence of an applicable exception, to collect margin collateral from counterparties to non-cleared security-based swaps transactions to cover current exposure and potential future exposure. The Segregation Rule would require SBSDs that maintain custody of customer securities and cash to (i) maintain physical possession or control over all excess securities collateral that has been provided by such customers to the SBSD and (ii) maintain a reserve of funds or qualified securities in an account at a bank that is equal in value to the net cash owed to customers.

In addition to the Margin Rule, Minimum Capital Rule and Segregation Rule, the proposed rules impose certain risk management standards on SBSDs and MSBSPs. The comment period for the proposed rules will close sixty (60) days after publication of the proposed rules in the Federal Register. Additional information on the SEC's proposed rules for SBSDs and MSBSPs is available here.

4. SEC's Three-Part Supervisory Strategy for Newly Registered Private Fund Advisers

On October 9, 2012, in an open letter from Drew Bowden, Acting National Associate Director of the SEC's Office of Compliance Inspections and Examinations ("OCIE"), to senior management of newly registered investment advisers (i.e., those that registered with the SEC after July 21, 2011) the SEC announced the launch of its initiative to conduct focused, risk-based examinations of investment advisers to newly registered private funds (the "Presence Exam Initiative"). These examinations will be conducted through OCIE's National Exam Program ("NEP"). The Presence Exam Initiative, which was also described by OCIE's Deputy Director Norm Champ in a May 11, 2012 speech before the New York City Bar Association, has three distinct phases: an "engagement phase", an "examination phase" and a "reporting phase."

The "engagement phase" is an educational phase that features speeches, staff letters, risk alerts and various other compliance outreach materials, available on the SEC's website. Its purpose is to inform newly registered firms of their obligations under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), describe the Presence Exam Initiative and explain OCIE's examination practices. In the examination phase, OCIE staff will review one or more identified "higher-risk" areas of the business of advisers selected for on-site examination, including but not limited to the advisers' marketing, portfolio management, conflict of interest controls, client asset protection measures and valuation policies. OCIE expects these examinations to occur over a two year period, after which, in the "reporting phase," OCIE intends to report its observations to the SEC and to the public.

NEP staff will contact newly registered investment advisers separately if they have been selected for an examination. Mr. Bowden's open letter to senior management of newly registered investment advisers is available here, and the full text of Mr. Champ's speech is available here.

5. SEC Offers Additional Guidance on Form PF

On June 28, 2012 and July 19, 2012 the staff of the SEC's Division of Investment Management updated its Frequently Asked Questions on Form PF (the "FAQs"). The updated FAQs address, among other topics, general filing information for private fund advisers and provide interpretive guidance relating to hedge funds, liquidity funds, private equity funds and fund of funds. The FAQs also clarify certain key definitions in Form PF, including but not limited to "gross notional exposure," "net asset value," "borrowings" and "listed equity derivatives." The FAQs are available here.

B. Other New and Proposed Securities-Related Legislation and Regulation

1. Stop Trading on Congressional Knowledge (STOCK) Act Subjects Private Fund Advisers to Potential Insider Trading Liability

On April 4, 2012, President Obama signed into law the Stop Trading on Congressional Knowledge Act (the "STOCK Act"). The STOCK Act, which primarily aims to prohibit insider trading by Members of Congress and other public officials, imposes a fiduciary duty on Members and employees of Congress with respect to "material, nonpublic information derived from such person's position as a Member of Congress or employee of Congress or gained from the performance of such person's official responsibilities." Though the focus of the STOCK Act is on political officials, the STOCK Act also exposes private fund advisers using political intelligence firms to potential liability for insider trading. Private fund advisers employing political intelligence firms may be exposed to insider trading liability as "tippees" if (i) a political intelligence firm receives material, nonpublic information from Members or employees of Congress and (ii) the private fund adviser trades on such material, nonpublic information received from the political intelligence firm. Private fund advisers using political intelligence firms are encouraged to conduct adequate and appropriate diligence and oversight over these firms to prevent trading by the fund on any material non-public information received by the political intelligence firm. The full text of the STOCK Act is available here.

2. SEC Proposes Rules under the Jumpstart Our Business Startups (JOBS) Act Eliminating the Prohibition Against General Solicitation and Advertising in Certain Regulation D/Rule 144A Offerings

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the "JOBS Act"). Section 201(a) of the JOBS Act required the SEC to relax the general solicitation and advertising prohibition in certain securities offerings made pursuant to Rule 506 of Regulation D ("Rule 506") and Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). On August 29, 2012, the SEC proposed its rule amending Rule 506 and Rule 144A as required by Section 201(a) of the JOBS Act.

Currently, Rule 506 is a non-exclusive safe harbor exemption from registration under the Securities Act for transactions by an issuer "not involving any public offering." As proposed, the amended Rule 506 will include a new paragraph (c) that will permit general solicitation or advertising in offerings made under that Rule, provided that the issuer takes "reasonable steps" to verify that all purchasers of the securities are accredited investors. According to the SEC, whether steps taken under the proposed Rule 506(c) are "reasonable" would be an "objective determination, based on the particular facts and circumstances of each transaction." These steps could include, but are not limited to, (i) the nature of the purchaser and the type of accredited investor that the purchaser claims to be; (ii) the amount and type of information that the issuer has about the purchaser; and (iii) the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount. Because offerings made under proposed Rule 506(c) are still considered non-public offerings, private funds engaged in general solicitation under proposed Rule 506(c) will remain eligible for the exclusions from the definition of "investment company" under Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940, as amended (the "Investment Company Act"). The proposed rule also makes conforming changes to Form D.

Rule 144A is a non-exclusive safe harbor exemption from registration under the Securities Act for resales of certain securities to Qualified Institutional Buyers ("QIBs"). The proposed rule amends Rule 144A to authorize resales of securities pursuant to Rule 144A using general solicitation or general advertising, provided that such securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believes is a QIB. The standards for reasonably determining whether a purchaser is a QIB under Rule 144A(d) remain unchanged.

Comments were due on the proposed rules on October 5, 2012. The SEC has received numerous comments on the proposed rules, including, among others, suggestions that (i) Rule 506(c) explicitly permit offerings made to knowledgeable employees of issuers, even if such employees are not accredited investors and (ii) the SEC coordinate with the CFTC to harmonize provisions affecting private fund advisers relying on certain CFTC exemptions. The full text of the proposed rules is available here. Additional information on the proposed rules is available here.

3. House Postpones Consideration of Bill Transferring Investment Advisor Oversight to Self-Regulatory Organization

On July 25, 2012, House Financial Services Chairman Spencer Bachus (R-Ala.) stated that he was placing on indefinite hold H.R. 4624, the Investment Adviser Oversight Act of 2012, pending consensus on the issue. The bill, proposed by Representative Bachus on April 25, 2012, would authorize one or more self-regulatory organizations ("SROs") to replace the SEC in its role of overseeing registered investment advisers. On June 6, 2012, in a hearing before the House of Representatives Committee on Financial Services, David G. Tittsworth, Executive Director and Executive Vice President of the Investment Adviser Association (the "IAA") stated the IAA's opposition to H.R. 4624 on the grounds that "it would subject thousands of advisory firms to an additional layer of regulation by a private regulator with broad rulemaking, inspection and enforcement authority – and, in all likelihood, that private regulator would be [the Financial Industry Regulatory Authority]." The full text of H.R. 4624 is available here, and Mr. Tittsworth's statements are available here.

C. Other Updates

1. California Publishes Final Private Fund Registration Exemption

On August 27, 2012, the California Department of Corporations ("CA DOC") published a final rule to amend Section 260.204.9 of Title 10 of the California Code of Regulations in response to the elimination of the federal "private adviser" exemption under the Advisers Act. The final rule makes non-substantive amendments to the revised rule proposed on June 18, 2012.

The amendment exempts from California's investment adviser registration requirements any "private fund adviser" (i.e., an investment adviser who provides advice solely to one or more funds excluded from the definition of an investment company under one or more of Sections 3(c)(1), 3(c)(5) and 3(c)(7) of the Investment Company Act ) that is not registered with the SEC and (i) is not, and none of its affiliates are, subject to disqualification by the SEC, (ii) files with CA DOC a copy of each report that an investment adviser is, or an exempt reporting adviser would be, required to file with the SEC pursuant to Rule 204-4 under the Advisers Act and (iii) pays the application and renewal fees required of registered advisers.

The proposed rule imposes additional requirements on private fund advisers that advise at least one private fund that relies on the exemptions from registration under Section 3(c)(1) and/or 3(c)(5) of the Investment Company Act and that is not a venture capital company (a "retail buyer fund"). Private fund advisers who advise retail buyer funds must (i) advise only those retail buyer funds whose outstanding securities are beneficially owned entirely by persons who (subject to certain grandfathering provisions), at the time of purchase from the issuer, meet the SEC's definition of "accredited investor" under the Securities Act or were managers, directors, officers or employees of the private fund adviser; (ii) disclose to each beneficial owner of a retail buyer fund at or before the time of purchase all services that will be provided by the private fund adviser and all duties the private fund adviser owes to such beneficial owner, and any other disclosures required under any other state or federal law; (iii) deliver to each beneficial owner of each retail buyer fund, on an annual basis, audited financial statements of each retail buyer fund; and (iv) comply with California's rules regarding performance fee restrictions. The final rule became effective August 27, 2012. Private fund advisers in California have sixty (60) days from the effective date to comply with any initial reporting due pursuant to the Rule 204-4 reporting requirement. Additional information on the final rule is available here.

2. Director of SEC Office of Compliance Inspections and Examinations Speaks on Conflicts of Interest and Risk Governance

On October 22, 2012, OCIE director Carlo di Florio addressed topics of conflict of interest and risk governance that were of interest to the SEC. The statements were made at a meeting of the National Society of Compliance Professionals in Washington, D.C. Mr. di Florio first explained that conflicts of interest are a key area for risk analysis under the SEC's risk-based examination strategy and described the conflicts of interest that are currently a high priority for NEP examinations, including: (i) compensation-related conflicts and incentives, (ii) portfolio management related conflicts, (iii) affiliations between investment advisers and broker-dealers, (iv) valuation, (v) transfer agent conflicts and (vi) exchange conflicts. Mr. di Florio also highlighted the SEC's Aberrational Performance Inquiry, an initiative in which SEC staff uses analytical models to identify hedge funds with suspicious returns, as a tool used by the SEC to identify conflicts among private fund registrants and described recent actions brought by the SEC from the inquiry.

Lastly, Mr. di Florio outlined what he considered three broad considerations for a firm's effective conflicts risk governance framework: (i) effective processes to identify, understand and prioritize all conflicts in the firm's business model; (ii) an effective compliance and ethics program which addresses the firm's identified and prioritized conflicts of interest; and (iii) an integrated process for addressing conflicts of interest within the firm's overall risk governance structure. With respect to establishing an effective compliance and ethics program, Mr. di Florio drew from the U.S. Federal Sentencing Guidelines seven factors he believes are "very germane to whether broker-dealers and investment advisers have met their supervisory obligations under the federal securities laws": (i) the existence of established standards and procedures; (ii) oversight by a firm's governing authority with respect to the firm's compliance and ethics program; (iii) leadership consistent with effective ethics and compliance program (i.e., exclusion from leadership positions of individuals who have engaged in conduct inconsistent with an effective compliance and ethics program); (iv) education and training of leadership, employees and agents about the firm's compliance and ethics program; (v) auditing and monitoring of the compliance and ethics program; (vi) incentives and discipline to support the compliance and ethics program and (vii) response and prevention. The full text of Mr. di Florio's speech is available here.

3. EU Regulations on Short-Selling and Credit Default Swaps

On November 1, 2012, Regulation No. 236/2012 of the European Parliament and of the Council of March 14, 2012 on short selling and certain aspects of credit default swaps (the "Regulation") came into effect across all EU member states. In general, the Regulation (i) restricts short selling by investors of EU sovereign shares and bonds to certain situations where there is sufficient assurance that the settlement can be effected when it is due and (ii) imposes notification requirements when net short positions in equities and sovereign debt reach or fall below certain prescribed thresholds. The Regulation also grants certain emergency powers to regulators to intervene in times of market crisis, which both Spanish and Greek authorities have already utilized. The full text of the Regulation is available here.


Since our last Report, there have not been a material number of tax developments relevant to private investment funds. However, a number of significant tax developments are pending. Many of the tax proposals discussed by President Obama and Governor Romney, as well as members of Congress in both political parties, will significantly affect investment funds if implemented. Such proposals include either decreasing or extending the current "Bush tax cuts" and capping the number of itemized deductions or types of itemized deductions that may be taken by individuals. Investment funds face significant uncertainty regarding these issues and should prepare for any eventuality. We will continue to monitor the progress of these proposals.

A. Recent Foreign Account Tax Compliance Act Developments

The Foreign Account Tax Compliance Act ("FATCA"), which was enacted in March 2010 in the Hiring Incentives to Restore Employment Act, requires a foreign financial institution ("FFI") to enter into an agreement with the Internal Revenue Service (the "IRS") and report U.S. accounts to the IRS or pay a thirty percent (30%) withholding tax on any "withholdable payment"2 made to the FFI or its affiliates. FATCA also requires certain non-financial foreign entities to provide withholding agents information on their substantial U.S. owners or pay the withholding tax.

1. Developments Regarding Intergovernmental Agreements

In conjunction with the release of the proposed regulations promulgated under FATCA on February 8, 2012, the United States issued a joint statement with France, Germany, Italy, Spain and the United Kingdom (the "FATCA Partners") outlining a possible intergovernmental framework for implementing FATCA using two model agreements. The two model agreements are identical in a number of ways. Under each model agreement, an FFI would report information to the FATCA Partner in the country in which the FFI is located, and the FATCA Partner would submit the information to the IRS pursuant to the agreement. Under both options, FFIs located in FATCA Partner countries would not need to enter into agreements with the IRS, would not be subject to withholding under FATCA and would not need to terminate the accounts of their non-FATCA compliant accountholders. However, one model provides for a reciprocal exchange of information such that the United States would agree to send certain information regarding accounts in U.S. financial institutions held by residents of the FATCA Partner to the FATCA Partner. The second model agreement does not have a reciprocal information exchange arrangement.

On September 12, 2012, the United Kingdom became the first FATCA Partner to sign an agreement entering into the intergovernmental framework, which may be found here. The agreement will be considered by the United Kingdom government in its 2013 finance bill. It generally follows the model agreement providing for a reciprocal information exchange arrangement. It is expected that additional FATCA Partners will enter into agreements reflecting the intergovernmental framework in the near future. Switzerland, Japan and the Netherlands, among other countries, have also indicated a willingness to enter into such agreements.

It is feasible that the agreements reflecting intergovernmental arrangements could become more important than the proposed regulations under FATCA for FFIs in countries with such agreements because the agreements can be tailored to suit each country's privacy and banking laws in light of the FATCA requirements. We will continue to monitor the progress of these agreements.

2. Developments Regarding Withholding Certificates

On June 6, 2012, the IRS released draft beneficial owner withholding certificates that foreign beneficial owner individuals and entities will use to certify to a withholding agent their status for purposes of FATCA. The draft forms are further described in our Client Alert, which may be found here.

On August 14, 2012, the IRS released a draft intermediary withholding certificate. The draft IRS Form W-8IMY has been changed from its original two pages to eight pages, adding a significant amount of complexity to intermediary withholding certificates. The form will be completed by any FFI or other foreign entity acting on behalf of another entity to certify to a withholding agent its status for purposes of FATCA from a list of more than twenty (20) status possibilities. The draft form may be found here.

3. IRS Announcement 2012-42

On October 24, 2012, the IRS released Announcement 2012-42 in response to comments identifying certain practical issues in implementing FATCA within the timeframes prescribed under the proposed regulations promulgated under FATCA. The announcement provides new timelines for various portions of FATCA implementation.

The new timelines should significantly reduce the burden of completing FATCA due diligence required by withholding agents and FFIs by aligning the timelines for all withholding agents (including U.S. withholding agents, FFIs in countries with intergovernmental agreements and FFIs in countries without intergovernmental agreements) to identify U.S. accounts. In addition, the new timelines grant additional time to satisfy certain FATCA due diligence requirements. For example, withholding agents generally will be required to implement new account opening procedures by January 1, 2014 (under previous guidance, withholding agents would have had to implement new account opening procedures as early as January 1, 2013).

The announcement also provides transitional rules for completing due diligence with respect to preexisting obligations (i.e., obligations existing prior to January 1, 2014). The announcement provides separate transitional rules for withholding and documentation for prima facie FFIs, withholding and documentation for other preexisting entity obligations and withholding and documentation requirements of so-called participating FFIs for preexisting individual accounts.

In addition, the announcement states that the final regulations promulgated under FATCA will provide that a participating FFI will be required to file information reports with respect to the 2013 and 2014 calendar years not later than March 31, 2015. It is also expected that the regulations will provide that the term "withholdable payment" will include gross proceeds from any sale or disposition occurring after December 31, 2016 of a property of a type that can produce interest or dividends that are U.S. source fixed determinable annual or periodic income. It is further expected that the regulations will provide that the grandfathered obligation rules will cover additional categories of obligations, including (i) any obligation that produces or could produce a foreign passthru payment and that cannot produce a withholdable payment, provided that the obligation is outstanding as of the date that is six months after the date on which final regulations defining the term "foreign passthru payment" are filed with the Federal Register; (ii) any instrument that gives rise to a withholdable payment solely because the instrument is treated as giving rise to a dividend equivalent pursuant to Section 871(m) of the Internal Revenue Code of 1986, as amended (the "Code")3 and the regulations promulgated thereunder, provided that the instrument is outstanding on the date that is six months after the date on which instruments of its type first become subject to such treatment; and (iii) any obligation to make a payment with respect to, or to repay, collateral posted to secure obligations under a notional principal contract that is a grandfathered obligation.

The announcement was published in Internal Revenue Bulletin 2012-47 on November 19, 2012 and may be found here.

4. Next Steps

The IRS has stated that it expects to issue final regulations under FATCA before the end of this year. It expects to issue the agreement that foreign financial institutions will enter into in order to avoid FATCA withholding in the near future. We will continue to monitor such developments.

B. Recent FBAR Developments

As discussed in previous issues of our Report, U.S. persons who have an interest in, or signatory authority over, a foreign account with a value over $10,000 are required to file a Foreign Bank Account Report ("FBAR"). The IRS has been actively calling for FBAR compliance and has instituted significant civil and criminal penalties for those who fail to file FBARs. The IRS has not provided significant new FBAR guidance since our last Report.

The IRS has provided guidance regarding the differences between FBAR filings and the Code Section 6038D ("Section 6038D") reporting regime, addressed in our last Report. Similar to the FBAR regime, Section 6038D requires disclosure on IRS Form 8938 of U.S. persons' ownership of certain foreign financial assets above a threshold amount. As a result, while the FBAR and Section 6038D reporting regimes are completely separate, they overlap to some extent. In order to ease the confusion over the filings, the IRS released a chart explaining the key differences between the two.

Among a range of differences listed in the chart, taxpayers are required to report interests in foreign hedge funds and foreign private equity funds on Form 8938 under the Section 6039D regime but not under the FBAR regime. In addition, reporting thresholds between the two regimes are different. For Form 8938, the reporting threshold is $50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad). For FBAR, the reporting threshold is $10,000 at any time during the calendar year.

The complete chart issued by the IRS may be found here.

C. Code Section 83(b) Guidance

On June 26, 2012, the IRS released Revenue Procedure 2012-29 to provide guidance regarding Code Section 83(b) elections, including sample language for the election. The revenue procedure may be found here.

By way of general background, if a service provider receives property (such as stock or interests in a limited liability company or partnership) in connection with the performance of services that is not transferable or is subject to a substantial risk of forfeiture, the service provider does not have to pay tax on the value of the property until it is transferable or not subject to a substantial risk of forfeiture (for example, time or performance vesting). A Code Section 83(b) election is generally filed to permit a service provider to include in gross income the excess (if any) of the fair market value of the property at the time of transfer over the amount (if any) paid for the property as compensation for services. Consequently, the election allows an employee or service provider to avoid recognizing ordinary income on any appreciation in value when the property vests or becomes transferable.

Revenue Procedure 2012-29 provides multiple examples of the federal income tax consequences of making a Code Section 83(b) election, as well as the potential downsides to making such an election. For example, as illustrated in Example 6 of the revenue procedure, one downside to making a Code Section 83(b) election is that if the property for which an election is made is forfeited, the service provider is not entitled to a deduction or credit for taxes paid as a result of filing the Code Section 83(b) election or upon the subsequent forfeiture of the property.

The revenue procedure also provides sample language for a Code Section 83(b) election. An election using the sample language, if properly completed and executed by an individual taxpayer, would satisfy the required contents under the Code of a Code Section 83(b) election with respect to shares of common stock subject to a substantial risk of forfeiture. For the election to be valid, a service provider must in addition satisfy all other applicable requirements, including filing the election within thirty (30) days of the date of transfer of the property.

The sample language is not required for a Code Section 83(b) election and the language is similar to language commonly found in existing Code Section 83(b) elections typically used. However, it is expected that practitioners will migrate to using the sample language, and funds should consider doing so as well.

D. New Medicare Tax Effective in 2013

Under current law, Medicare taxes apply only to wages. In 2010, President Obama signed into law H.R. 4872, the Health Care and Education Reconciliation Act of 2010. Pursuant to H.R. 4872, beginning in 2013, a 3.8% "Medicare" tax will, for the first time, be applied to certain investment income of estates, trusts and individuals with income in excess of threshold amounts defined under the Code.

The new tax will be imposed on "net investment income." The term "net investment income" generally includes interest, dividends, annuities, royalties, rents, passive activity income (as defined under Code Section 469) and capital gain. Notably, income from trading in financial instruments or commodities, minus allowable deductions that are properly allocable to such income or gain, is treated as net investment income even if the trading rises to the level of a trade or business for U.S. tax purposes.

Partnership expenses that pass through to individual limited partners of funds as Code Section 212 miscellaneous itemized deductions (as opposed to Code Section 162 trade or business expenses) will generally not be available to offset net investment income for purposes of this tax. Thus, the status of a partnership as a "trader" or an "investor" for federal income tax purposes may have a significant effect on the tax liability under the new tax of a fund's limited partners.

Net investment income does not include interest on tax-exempt bonds. As a result, investments in tax-exempt bonds may become important for funds wishing to help their investors avoid application of the new tax.

Gain from the sale of a partnership interest or stock in an S corporation will be considered net investment income only to the extent that gain or loss would be taken into account by the partner or shareholder if the entity had sold all its properties for fair market value immediately before the disposition. Thus, generally only net gain or loss attributable to property held by the partnership or S corporation which is not property attributable to an active trade or business will be considered net investment income.

For individuals, the tax will be 3.8% of the lesser of: (i) net investment income for the tax year or (ii) the excess of the modified adjusted gross income for the tax year over a statutory defined "threshold amount." For trusts and estates, the tax will be 3.8% of the lesser of: (i) the trust's or estate's undistributed net investment income or (ii) the excess of the trust's or estate's adjusted gross income over the dollar amount at which the highest trust or estate income bracket, respectively, begins for the applicable taxable year. With respect to individuals, the "threshold amount" is: (i) $250,000 for joint returns and surviving spouses; (ii) $125,000 for married taxpayers filing separate returns, which is half the dollar amount for joint returns and surviving spouses; and (iii) $200,000 in all other cases.

The tax will not apply to a non-resident alien or to a trust all the unexpired interests in which are devoted to charitable purposes. The tax also will not apply to a trust that is exempt from tax under Code Section 501 or a charitable remainder trust exempt from tax under Code Section 664. However, the tax will not be deductible in computing any tax imposed by subtitle A of the Code (relating to income taxes and including the alternative minimum tax).

The IRS is expected to issue proposed regulations regarding the new Medicare tax, which will further address what types of income are captured under net investment income. The name of the tax is also expected to be changed to "net investment income tax." The current reference to the tax as a "Medicare tax" is somewhat confusing as it could be referencing the "Additional Medicare Tax," which is also a new tax that applies to individuals' wages, other compensation and self-employment income over certain thresholds. We will continue to monitor the progress of these proposed regulations.

E. Governments Increase Partnership Audit Activity

It has been brought to our attention that federal, state and international audits of alternative investment vehicles, including hedge funds, have been significantly increased in recent months. The increased audit activity appears to be driven by need for increased revenue and due to rapid growth in the alternative investment vehicle industry. Audits have particularly focused on withholding by, and trader versus investor status of, partnership entities.

In light of such increased audit activity, hedge funds should prepare for potential audits of their partnership entities by keeping extensive financial records of partnership activities as well as copies of partnership agreements. We will continue to monitor the progress of these audit activities.


Hedge funds continue to be involved in litigation, both as defendants and plaintiffs, over a wide variety of issues. Recently, courts have addressed such important issues as the liability of auditors for hedge fund losses based on their failure to detect the Madoff fraud, and the enforceability of a side agreement between an investor and a fund. Significant recent case rulings include the following:

  • The Second Circuit affirmed the district court's dismissal of claims by hedge funds against auditors of Madoff-related funds for securities fraud, common law fraud, negligence and breach of fiduciary duty.
  • The Eastern District of New York approved a settlement between the SEC and two former Bear Stearns hedge fund managers alleged to have caused investor losses of over $1.6 billion.
  • The Middle District of Florida approved a settlement between a receiver for hedge funds and a prior law firm of the funds relating to the firm's alleged involvement in the Ponzi scheme of the funds' manager.
  • The Grand Court of the Cayman Islands recently affirmed a liquidator's denial of investors' proofs of claim in the winding up of a hedge fund, where a side agreement between the investors and a director of the fund did not change the limitations on redemptions set in the fund's articles of association.

A. Update on Previously Reported Cases

Consolidated Actions Against Banks Accused of Colluding To Manipulate LIBOR Subject To Motions To Dismiss

In the Fall 2011 issue of our Report, we noted that European asset manager FTC Capital GMBH ("FTC Capital") and two of its futures funds had filed a putative class action in the Southern District of New York, alleging that during the 2006-2009 period, twelve banks conspired to artificially depress the London interbank offered rate ("LIBOR"). FTC Capital alleged that the defendant banks colluded to suppress LIBOR in order to make the banks appear more financially healthy than they actually were.

Since the complaint was filed, the litigation has become significantly more complex. As we reported in the Spring 2012 issue of our Report, the Judicial Panel on Multi-District Litigation transferred twenty-two other cases involving LIBOR to the Southern District of New York,4 and on November 29, 2011, the court consolidated the actions and appointed interim class counsel for two putative classes of plaintiffs, one group that engaged in over-the-counter transactions and another group that purchased financial instruments on an exchange.

Since the consolidation, still more actions have been filed and consolidated into the multi-district litigation proceedings. In April, several amended complaints were filed, and in June, the defendants filed multiple motions to dismiss. The motions have been briefed and await a decision. In the meantime, the Court has stayed the handful of actions not subject to the motions to dismiss pending a ruling on the motions.

B. New Developments in Securities Litigation

1. Second Circuit Affirms Dismissal of Hedge Fund Investors' Claims Against Fund Auditors Who Failed to Detect Madoff Fraud

In two related cases, investors in funds managed by Tremont Group Holdings, Inc. ("Tremont"), which fed into Bernard L. Madoff Investment Securities, sued Tremont and accounting firms KPMG LLP, KPMG (Cayman), and Ernst & Young LLP (collectively, the "Auditors"), claiming that the Auditors were liable for securities fraud, common law fraud, negligence and breach of fiduciary duty for failing to detect the Madoff fraud. The plaintiffs, a number of individuals and hedge funds that had invested in the Tremont funds, argued that the Auditors failed to conduct audits of the Tremont funds in accordance with Generally Accepted Auditing Standards and knowingly and recklessly issued false and misleading audit opinions. The investors argued that they were entitled to rely on those opinions, which were addressed to "The Partners" of the Tremont funds. The Southern District of New York granted the Auditors' motions to dismiss. The Second Circuit affirmed.5

In affirming the dismissal of the plaintiffs' securities fraud claims, the Court explained that not only must such claims meet the heightened pleading requirements of Federal Rule of Civil Procedure 9(b), which requires the facts to be "stated with particularity," but also, under the Private Securities Litigation Reform Act, as amended (the "PSLRA"), a plaintiff must plead scienter, or a particular state of mind, with specificity. To do so, a plaintiff may allege facts that either "(i) show that the defendant had both the motive and opportunity to commit the alleged fraud, or (ii) constitute strong circumstantial evidence of conscious misbehavior or recklessness."

Here, the Second Circuit agreed with the district court that rather than sufficiently pleading scienter, "the more compelling inference as to why Madoff's fraud went undetected for two decades was his proficiency in covering up his scheme and deceiving the SEC and other financial professions." The Court characterized the allegations as "fraud by hindsight." The same pleading defect also doomed the plaintiffs' claims for common law fraud.

While the district court's rationale for dismissing the non-fraud common law claims was based on state law that was no longer valid, the Second Circuit found alternate grounds for dismissing those claims. For the plaintiffs' negligence claims, the Court explained that "accountants may not be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports unless a plaintiff shows (i) that the accountants were aware that the financial reports were to be used for a particular purpose or purposes; (ii) in furtherance of which a known party or parties was intended to rely; and (iii) some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants' understanding of that party or parties' reliance." The second prong required that the accountants knew "the identity of the specific nonprivy party." The plaintiffs' argument that the audit opinions were addressed to "The Partners" of the funds failed because Tremont, not the Auditors, sent the reports to the investors. Because the plaintiffs failed to show that the Auditors were aware of their identities or that there was any direct contact between them, the district court properly dismissed the negligence claims.

Similarly, as to the fiduciary duty claims, the plaintiffs had not demonstrated a fiduciary relationship, much less a "conventional business relationship," and thus those claims were properly dismissed.

2. Eastern District of New York Approves SEC Settlement With Bear Stearns Hedge Fund Managers

Following the collapse in 2007 of Bear Stearns, including the $1.6 billion in losses suffered by two of its hedge funds, the government indicted the funds' managers, Ralph Cioffi ("Cioffi") and Matthew Tannin ("Tannin"), on charges of securities fraud and wire fraud. The SEC also brought a civil enforcement proceeding against them to recover monetary damages. Cioffi and Tannin were ultimately acquitted in the criminal case and have now settled the civil charges with the SEC. On June 18, 2012, the United States District Court for the Eastern District of New York approved the settlement.6

Judge Block acknowledged that he had previously considered the settlement to be "chump change," but said that he nevertheless was "reluctantly" signing the proposed consent judgments. Before explaining the terms of the settlement, the Court went through the history of the financial market collapse and Bear Stearns' role, in particular the effect of the two hedge funds, which were heavily invested in subprime-backed securities and highly leveraged.

The settlement provided, inter alia, that the defendants were permanently enjoined from violating Section 17(a)(2) of the Securities Act, which prohibits them from obtaining money or property by means of any untrue statement of a material fact or omission of a material fact. Cioffi was ordered to disgorge $700,000 and pay a civil penalty of $100,000, and Tannin to disgorge $200,000 and pay a civil penalty of $50,000. They were both barred from the securities industry for a number of years.

Judge Block explained that the SEC has only limited remedies: (i) seeking injunctions to prevent future securities law violations, (ii) issuing "bar orders" prohibiting individuals from being associated with the securities industry, (iii) seeking disgorgement of "ill gotten gains" and (iv) imposing monetary penalties. Both disgorgement and monetary penalties are "measured by the defendant's gains and not by victims' losses." Because the funds' losses were much larger than the defendants' profits, the SEC could not recover a significant portion of the losses. The Court explained that investors still have recourse through a private right of action, but that Congress has placed several obstacles in the path of such litigation, including the heightened pleading standards under the PSLRA.

After discussing Judge Rakoff's recent refusal to approve an SEC settlement on the ground that it was not in the public interest,7 and once again bemoaning the SEC's limited enforcement tools, the Court found that the settlement was fair, reasonable and adequate. However, Judge Block noted that "Congress may wish to consider broadening the SEC's power to recover amounts more reflective of investor losses" to avoid "leav[ing] investors out in the cold."

3. Court Approves Receiver's Settlement with Law Firm in Nadel Ponzi Scheme Case

In other settlement news, the U.S. District Court for the Middle District of Florida recently approved a receiver's settlement with a law firm.8 The settlement stemmed from an SEC enforcement action dealing with a Ponzi scheme perpetrated by fund manager Arthur Nadel ("Nadel"). The Court had appointed a receiver for the hedge funds to recover funds for investors and granted the receiver permission to pursue claims against the law firm Holland & Knight LLP ("Holland & Knight") and one of its partners, Scott R. MacLeod ("MacLeod").

Holland & Knight had provided legal services to the funds and Nadel's various related management entities for over six years, until Nadel disappeared and his Ponzi scheme was discovered. Their representation included preparation of various private placement memoranda that were used to sell interests in the funds to certain investors, as well as representation of the hedge funds and the funds' managers.

After determining that Holland & Knight may have been professionally negligent, breached fiduciary duties owed and/or aided and abetted Nadel's own fraud and breaches of fiduciary duty by allowing the Ponzi scheme to continue longer than it otherwise might have, the receiver brought suit in Florida state court in 2009. In August 2012, the receiver and defendants engaged in mediation and eventually reached a settlement.

According to the terms of the settlement, defendants will pay the receiver $25 million. The settlement also included the court's issuance of an injunction, or bar order, barring third parties from suing Holland & Knight and MacLeod over claims related to the Nadel fraud (the "Bar Order"). The Bar Order applies to all investors or creditors and any other potential joint tortfeasors, and precludes them from bringing claims for contribution or indemnity or other claims "which relate in any way to the operation of the Receivership Entities or to Nadel's Ponzi scheme."

In his motion for approval of the settlement, the receiver cited to In re Munford, Inc., 97 F.3d 499 (11th Cir. 1996), in which the Eleventh Circuit approved the use of bar orders in bankruptcy proceedings because (i) public policy favors pre-trial settlement, (ii) litigation costs are burdensome on a bankrupt estate and (iii) bar orders facilitate settlement. The Munford court also pointed out that "defendants buy little peace through settlement unless they are assured that they will be protected against codefendants' efforts to shift their losses through cross-claims for indemnity, contributions and other causes related to the underlying litigation." The receiver argued that the same factors applied in the settlement with the defendants in this action.

On October 2, 2012, the Court approved the settlement, including the bar order, recognizing that it had previously approved a similar order in the receiver's settlement with Goldman Sachs.

4. Cayman Islands Court Holds Side Agreement Unenforceable in Winding Up Hedge Fund

In 2009, Cayman Islands hedge fund Matador Investments Limited ("Matador") was forced into liquidation when Lansdowne Limited ("Lansdowne") and Silex Trust Company Limited (collectively, the "Investors") sought its winding up. After the Investors lodged their proofs of debt with the Official Liquidator, the Liquidator rejected their claims. On appeal, the Grand Court of the Cayman Islands recently denied the Investors' request that the rejection be set aside.9

Matador came into being after two friends, Priscilla Waters ("Waters") and Eva Guerrand-Hermes ("Eva"), discussed entering into a joint venture in 2004. Eva was married to Olaf Guarrand-Hermes ("Olaf"). Waters' financial adviser, John MacKay ("MacKay"), assisted with the process. Eva and MacKay became the directors of Lansdowne.

In forming Matador, Waters informed Eva that she would be investing virtually all her liquid assets into the fund. Eva "told [Waters] that she should be able to withdraw as much money as she needed every quarter."

Matador was incorporated in April 2005 with Eva and Olaf as its directors. On April 25, 2005, MacKay transferred $5.3 million and £1.4 million from the Investors to Matador on Waters' behalf. On April 27, 2005, Waters and Eva signed an "Agreement in Principle," in which they agreed to draft a shareholder agreement and an amendment to the private placement memorandum dealing with redemption rights and other issues. They never did so.

In 2007, Waters' new financial adviser advised her to redeem the entirety of her investment in Matador for tax reasons. In 2008, the Investors submitted redemption requests for all their shares in Matador. However, the directors of Matador, Eva and Olaf, imposed a 10% scale down or "gate" on redemptions, meaning that the fund was only required to pay 10% of the overall value of the shares in the fund, with a further 10% payable at the next redemption day and so on until the request was satisfied. When the fund stopped making payments, the Investors presented a Petition for the winding up of Matador under Cayman Islands law and the Court appointed an Official Liquidator. The Investors submitted proofs of debt, which the Liquidator rejected because he believed their claims were subject to the gate. The Investors appealed, arguing that the side agreement between Waters and Eva exempted Waters from the gate.

The Investors argued that Waters' agreement with Eva that Waters could withdraw as much money as she needed at any time was binding on Matador since Eva was a director of the fund. The Court disagreed, finding that the oral side agreement and the Agreement in Principle were not binding on Matador because Section 37(3)(c) of the Companies Law requires that redemption of shares be effected in a manner authorized by the articles of association. Matador's articles of association allowed for the 10% gate and thus the agreement between Waters and Eva could not change it. The Court also noted that neither Waters nor Eva had the authority to bind the Investors or Matador, respectively, to their agreement. Thus, the Court affirmed the Liquidator's decision.


As anticipated, the SEC has brought a steady stream of enforcement actions thus far in 2012. Through October 1, 2012, the SEC initiated actions against 115 separate entities and individuals for misconduct relating to the financial crisis alone.10 Total penalties, disgorgement and other monetary relief obtained from just those actions topped $2.2 billion.11 Yet, as many as 81% of Americans believe that the government has not done enough to prevent corporate misconduct.12 The SEC has taken notice. Commenting on the current enforcement environment, SEC Commissioner Luis Aguilar stated, "The public must have faith that the SEC and other institutions are aggressively working to protect the integrity of the securities market. And, for that faith to return, the SEC must be pro-active in demonstrating that it is pro-investor."13

This "pro-investor" focus by the SEC includes the continued scrutiny of hedge fund advisors. Bruce Karpati, Chief of the Asset Management Unit of the SEC's Division of Enforcement, recently stated the following:

There is illegal conduct occurring in the hedge fund industry. There is a certain segment of the hedge fund industry that has crossed the line in the last couple of years. While, yes, the hedge fund industry serves sophisticated clientele, clearly those people are also in need of protection. The financial crisis has brought out some of the scandals we've seen in the last few years. Just the creation of a unit that can focus on certain issues like insider trading has a deterring effect. Knowing that we are looking at certain practices has caused some managers to take a careful look at what they are doing in specific areas.14

In fact, the SEC announced in October that since the beginning of 2010, "the SEC has filed more than 100 cases involving hedge fund malfeasance such as misusing investor assets, lying about investment strategy or performance, charging excessive fees, or hiding conflicts of interest."15 These types of pronouncements ensure that the hedge fund industry will remain an enforcement priority for the foreseeable future.

To that end, the SEC continues to expand its array of information gathering techniques to root out securities fraud. According to the SEC, one particularly useful tool has been the SEC's Whistleblower program. As of August 8, 2012, the SEC has received a total of 2,820 tips from the United States and at least 45 different countries.16 Implemented just over a year ago, the Whistleblower program appears to be a popular and potentially effective way for the SEC to uncover illegal activity it might not otherwise find.

The Whistleblower program, of course, is not the only investigative means by which the SEC can bring enforcement actions against the hedge fund industry. The SEC has also instituted the "Aberrational Performance Inquiry" initiative, which we discussed in our last Report. The initiative uses proprietary risk analytics to evaluate hedge fund returns. Inconsistent or abnormal returns can subject a fund to closer scrutiny. As of October 17, 2012, seven cases have been brought as a result of the Aberrational Performance Inquiry.17

Another focus specifically cited by Mr. Karpati is the SEC's ongoing review of investment adviser disciplinary records. Investment advisers identified as "high risk" as a result of a poor disciplinary record now garner increased attention from the SEC.18

Consistent with previous Reports, insider trading, Ponzi schemes, and expert network firms still top the list of SEC actions relating to hedge funds. Other areas of inquiry include valuation of a fund's assets and preferential treatment of certain investors over others.

A. Insider Trading

Insider trading remains at the forefront of SEC enforcement efforts.19 Bruce Karpati recently highlighted the staff's perceived link between performance expectations of hedge fund managers and insider trading, "One of our big focuses in the [Asset Management Unit] is looking at performance and valuation issues. There has been a spate of insider trading cases since 2009." He stated "[i]n order to succeed in the [hedge fund] industry, you have to have performance. So, there is the temptation to cross the line when it comes to insider trading."20 Some of the most recent cases are highlighted below.

1. SEC v. Chellam

In SEC v. Chellam,21 the SEC filed a civil injunction action in the U.S. District Court for the Southern District of New York against Kris Chellam ("Chellam"), a former Chief Financial Officer of technology company Xilinx. The action charges Chellam with illegally tipping Raj Rajaratnam ("Rajaratnam"), the founder of hedge fund advisory firm Galleon Management, LP ("Galleon"), with material nonpublic information about Xilinx.

According to the complaint, Chellam warned Rajaratnam about "downward trends" in Xilinx's business which were more pronounced than the company's public financial projections.22 Chellam disclosed these downward trends in a telephone call with Rajaratnam. Only minutes after the call concluded, Rajaratnam caused Galleon to short more than 350,000 shares of Xilinx stock. The next day, more than 300,000 additional shares were shorted.23 Once the information Chellam provided became public, the Galleon hedge funds reaped illicit profits of approximately $978,684.24 At the time Chellam provided this information, he had over $1 million invested in a Galleon hedge fund.25 A few months later, Chellam was hired by Galleon as the Co-Managing Partner of the Galleon Special Opportunities Fund. Once employed by Galleon, Chellam continued to obtain and pass along inside information concerning Xilinx to others at Galleon. Chellam's compensation during his tenure at Galleon was approximately $675,000.26

Chellam was charged with violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5, and Section 17(a) of the Securities Act. Chellam has agreed to settle the charges. The proposed final judgment orders Chellam to pay $675,000 in disgorgement, $106,383.05 in prejudgment interest, and a $978,684 penalty. Chellam also agreed in a related administrative proceeding to a permanent officer and director bar.27 The settlement is subject to court approval.

2. SEC v. Clay Capital Management, LLC

On August 29, 2012, the SEC announced that the U.S. District Court for New Jersey had entered final judgments against hedge fund advisor Clay Capital Management, LLC ("Clay Capital") and its former Chief Investment Officer, James F. Turner II ("Turner"), for their roles in alleged insider trading which netted nearly $3.9 million in illicit gains.28

In the complaint, the SEC alleged that Turner traded on inside information that he received from his brother-in-law, a director of business development at Autodesk, Inc. ("Autodesk"), and from a close friend, who was a recruiting technology manager for Salesforce.com ("Salesforce").29 The material nonpublic information included Autodesk's plan to acquire Moldflow Corporation ("Moldflow"), and information about Autodesk's and Salesforce's quarterly earnings in advance of its public earnings announcements. Turner subsequently traded on these tips in his personal accounts, his family members' accounts, and on behalf of Clay Capital's hedge funds.30 Turner also recommended to other friends and family members that they trade in the securities of Autodesk, Moldflow and Salesforce. All told, the illicit gains from the insider trading totaled nearly $3.9 million.

In consenting to the entry of final judgment, Turner and Clay Capital are permanently enjoined from violating Section 17(a) of the Securities Act, Sections 10(b) and 14(e) of the Exchange Act, and Rules 10b-5 and 14e-3 thereunder.31 Additionally, Clay Capital agreed to disgorge $1,062,822.36 and to pay $182,444.73 in prejudgment interest, for a total judgment of $1,245,267.09;32 although, based on Clay Capital's financial condition, the agreement waived all but $850,000 of the total judgment.33 Turner consented to disgorge $2,585,241.94 and to pay $430,047.42 in prejudgment interest, for a total judgment of $3,288,289.36.34 Similarly, the agreement waived all but $1,250,000 of the total judgment based on Turner's financial condition.35

In a related administrative proceeding, Turner also consented to a permanent security industry bar.

In addition, in a related criminal case, Turner pled guilty to federal securities fraud and was sentenced to twelve months of incarceration, to be followed by three years of supervised release, and payment of a $25,000 fine.36

B. Expert Network Firms

The SEC has continued its pursuit of insider trading stemming from information passed by "expert network" firms to market participants. "Expert network" firms arrange for industry experts to provide professional research analysis to investment managers. As of mid-year, the SEC has charged 23 defendants with securities law violations from its investigation of expert networks.37

1. SEC v. Longoria

In previous Reports, we detailed some of the judgments that have been entered in the case of SEC v. Longoria.38 In Longoria, the SEC filed an initial complaint in the U.S. District Court for the Southern District of New York charging two employees of the so-called "expert network" firm Primary Global Research LLC ("PGR") and four "consultants" with insider trading for illegally tipping hedge funds and other investors. An amended complaint charged a New York-based hedge fund advisor and four hedge fund portfolio managers and analysts with illegally trading on confidential information obtained from technology company employees who were also acting as PGR consultants. According to the SEC, the scheme netted more than $30 million from trades based on material, nonpublic information. The charges were the first against traders in the SEC's ongoing investigation of insider trading involving expert networks.

Since our last Report, the SEC has secured a final judgment with respect to defendant James Fleishman ("Fleishman").39 According to the SEC, Fleishman, a vice president of sales at PGR, assisted in the transfer of material, nonpublic information from PGR consultants to PGR clients, and passed material, nonpublic information from PGR consultants directly to PGR clients.40 In particular, the SEC alleged that Fleishman "routinely directed prospective clients to set up 'trial' sessions with PGR's most popular 'experts,' . . . who Fleishman knew would share valuable inside information that would entice prospective clients." Moreover, "[t]o assuage prospective clients' concerns that this illegal activity would be detected, Fleishman assured them that PGR would not monitor or record their calls with the PGR experts." The evidence against Fleishman included emails that suggested that he knew PGR experts were providing material, nonpublic information to PGR clients. For instance, when discussing PGR's clients internally, Fleishman made reference to "fast money" clients, who would "get [inside] info[rmation] and trade on it that day."

The final judgment permanently enjoins Fleishman from violations of Section 10(b) of the Exchange Act and Rule 10b-5, thereunder, and orders him to disgorge $49,150 of ill-gotten gains, which is to be deemed satisfied by the order of forfeiture of $49,150 entered against Fleishman in the parallel criminal action against him.41 Fleishman was also sentenced to a 30-month term of imprisonment in the parallel criminal action, which he is currently serving.42 Due to the criminal penalties entered against Fleishman, the SEC did not seek a civil penalty from the settlement.43

In the related administrative proceeding, Fleishman agreed to a permanent securities industry bar.44

2. SEC v. Nguyen

In SEC v. Nguyen,45 the SEC filed a civil injunctive action in the U.S. District Court for the Southern District of New York charging Tai Nguyen ("Nguyen") with insider trading. The SEC alleges that from 2006 through 2009, Nguyen frequently traded in the securities of Abaxis, Inc. ("Abaxis") based on material, nonpublic information that he received from a close relative employed in Abaxis' finance department concerning quarterly earnings.46 The complaint alleged that Nguyen garnered approximately $145,000 in illegal profits from trading in Abaxis for his own account during this time period.47

Nguyen was also the owner of Insight Research, an "expert network" firm that provided equity research to investment advisers. Insight Research's clients included hedge fund advisors Barai Capital Management ("Barai Capital") and Sonar Capital Management ("Sonar Capital"), who collectively paid Nguyen's firm tens of thousands of dollars a month in fees.48 According to the SEC, Nguyen passed along inside information concerning Abaxis to portfolio managers at Barai Capital and Sonar Capital, who then caused the hedge funds they managed to trade Abaxis securities based on that inside information. As a result of these tips, the funds purportedly made over $7.2 million in illegal profits.49

The SEC charged Nguyen with violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act.50 The complaint seeks a final judgment ordering Nguyen to disgorge ill-gotten gains, with interest, and pay financial penalties. The complaint also seeks to permanently enjoin Nguyen from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act.51

C. Ponzi Schemes

Ponzi schemes remain a high profile target for the SEC. As the SEC recently noted in a press release, "[t]he most serious hedge fund frauds involve advisers who play fast and loose with investor money."52 Two recent examples of Ponzi scheme cases are described below.

1. SEC v. Jawed

In SEC v. Jawed, the SEC charged Yusaf Jawed ("Jawed"), a Portland-based investment adviser, with operating a long running Ponzi scheme that raised over $37 million from more than 100 investors throughout the country.53 According to the SEC's complaint, Jawed "presented himself as a sophisticated financial adviser who managed successful hedge funds. Contrary to his representations, Jawed used the money entrusted by investors to pay off old investors, to pay himself, to travel, and to create an illusion of success and achievement." The SEC alleges that Jawed induced investors to invest in several hedge funds he managed, through his companies Grifphon Asset Management LLC and Grifphon Holdings LLC, using marketing materials that falsely claimed double-digit returns.54

To facilitate his Ponzi scheme, the SEC alleges that Jawed created phony assets, sent bogus account statements to investors, and, as the funds were collapsing, manufactured a sham buyout of funds to make investors think that their hedge fund interests would be redeemed.55 The SEC also claims that Jawed's marketing materials falsely represented that certain funds would invest in publicly traded securities, and that investors' assets were maintained at reputable financial institutions.56

The SEC charged Jawed and his investment management firm with violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.57 The SEC seeks a permanent injunction, disgorgement with prejudgment interest thereon and civil monetary penalties.58

2. SEC v. Alleca

In SEC v. Alleca,59 the SEC filed a complaint for injunctive and other relief in the U.S. District Court for the Northern District of Georgia against hedge fund manager Angelo Alleca ("Alleca") and his investment management firm, Summit Wealth Management, Inc., for allegedly engaging in a Ponzi like scheme to cover up undisclosed trading losses.

The complaint alleges that, in 2004, Alleca and his investment management firm began soliciting investments in a private fund that investors were told would operate as a "fund-of-funds" – i.e., it would invest money in other funds and investments rather than directly in stocks and other securities. Based on these representations, Alleca raised approximately $17 million from approximately 200 clients.60

Instead of investing in other funds, however, starting in or around 2006, Alleca began actively trading with client money and incurred substantial losses.61 When investors began making redemption requests, Alleca started two additional private funds to purportedly cover-up these losses. Specifically, Alleca allegedly used monies from these new private funds to satisfy redemption requests by investors in the original fund, and issued false account statements. Alleca's scheme collapsed when the new funds also suffered significant losses.62

The SEC charged Alleca with violations of Section 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act, Section 10(b) of the Exchange Act, Sections (a), (b) and (c) of Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Advisers Act. Among other relief, the SEC seeks a permanent injunction enjoining Alleca from violating the securities laws, an accounting of the use of proceeds of the fraudulent conduct alleged, disgorgement, and an order pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act imposing civil penalties.63

D. Valuation of Fund Assets

The SEC continues to have a strong interest in how hedge funds value and account for their holdings. As Bruce Karpati recently explained, "[b]ecause of the management and incentive fee structures, sometimes we see an emphasis put on compensation rather than robust valuation practices. So, we focus on valuation procedures. We look at how portfolios are being valued."64

1. SEC v. Yorkville Advisors, LLC

In SEC v. Yorkville Advisors, LLC,65 the SEC filed a complaint in U.S. District Court for the Southern District of New York for injunctive and other relief against investment-adviser Yorkville Advisors, LLC ("Yorkville") and two of its employees based on a fraudulent scheme to report false and inflated values for certain convertible debentures, convertible preferred stock and promissory notes held by the hedge funds managed by Yorkville. According to the SEC's complaint, the purpose of the scheme was to (i) "increase the Funds' assets under management and to maintain the Funds' positive year-end performance, allowing Defendants to claim entitlement to greater fees than allowable"; and (ii) "tout positive investment returns even under adverse market conditions, which [were] used to solicit investors to make additional investments in the Funds as well as in new funds."66

To effectuate the scheme, employees Mark Angelo ("Angelo") and Edward Schinik ("Schinik"), the President and Chief Financial Officer of Yorkville respectively, allegedly ignored Yorkville's private placement memorandum and compliance manual that required fund assets to be valued at "fair value" in accordance with generally accepted accounting principles. Instead, according to the SEC, the vast majority of convertibles in the funds Yorkville managed were marked at face value, without using any financial models, independent pricing or other methods to arrive at a "fair value." The SEC claims that, by valuing the assets at face value, Yorkville could continue to charge and collect fees based on inflated values for these investments.67 The defendants also allegedly made numerous other misrepresentations to investors including with respect to, (i) the value of collateral Yorkville held in securing the convertibles and promissory notes, (ii) the funds' liquidity, (iii) the age of the convertibles in the portfolio, (iv) the usage of a third party valuation service to value the convertibles and (v) the frequency with which the funds' valuation committee met.68

The complaint charges Yorkville with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, as well as Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. Angelo is charged with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. He also is charged with aiding and abetting Yorkville's violations of the Exchange Act and Advisers Act. Schinik is charged with violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and with aiding and abetting Yorkville's violations of the Exchange Act and Advisers Act. The relief sought includes a permanent injunction against defendants from future violations of the federal securities laws, disgorgement, pre-judgment interest and civil penalties.69

To read this article in full, please click here.


1 On October 25, 2012, Senators Jeff Merkley (D-OR) and Carl Levin (D-MI) wrote a letter to the relevant agencies calling for "an end to the delay in issuing [the] implementing regulations" and for the agencies to issue the final regulations "no later than the end of the year." The full text of the Senators' letter is available here.

2 A withholdable payment is defined to mean, subject to certain exceptions: (i) any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the United States; and (ii) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States.

3 References to the "Code" are to the Internal Revenue Code of 1986, as amended.

4 In re: Libor-Based Financial Instruments Antitrust Litigation, No. 11-md-2262 (S.D.N.Y.).

5 Meridian Horizon Fund, LP v. KPMG (Cayman), No. 11-3311-cv; Brainson v. Ernst & Young LLP, No. 11-3725-cv (2d Cir.).

6 Securities and Exchange Commission v. Ralph R. Cioffi and Matthew M. Tannin, Case No. 1:08-cv-02457-FB-VVP (E.D.N.Y.).

7 That decision was SEC v. Citigroup Global Mkts., Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011). In it, Judge Rakoff denied approval of the proposed settlement after a searching inquiry on the ground that "a court cannot grant the extraordinary remedy of injunctive relief without considering the public interest," and the proposed settlement did not serve the public interest because it did not require the defendants to admit liability and the disgorgement and penalties were "pocket change." Id. at 331-34. The Second Circuit recently granted a stay of the litigation based on the likelihood of the parties' success in appealing Judge Rakoff's decision. SEC v. Citigroup Global Mkts., Inc., 673 F.3d 158 (2d Cir. 2012).

8 Securities & Exchange Commission v. Nadel, Case No. 8:09-cv-00087-RAL-TBM (M.D. Fla.).

9 Lansdowne Limited v. Matador Investments Limited, Cause No. FSD 103/2011 (Grand Court of the Cayman Islands).

10 "SEC Enforcement Actions Addressing Misconduct that Led to or Arose From the Financial Crisis," (Oct. 1, 2012), available at http://www.sec.gov/spotlight/enf-actions-fc.shtml#keyStatistics.

11 Id.

12 "The 2012 Ethics and Action Survey: Voices Carry" (September 2012), available at http://www.labaton.com/en/about/press/upload/Ethics-Action-II-Report-Final.pdf.

13 Speech by Commissioner Luis Aguilar, Taking a No-Nonsense Approach to Enforcing the Federal Securities Laws, Securities Enforcement Forum 2012 (Oct. 18, 2012).

14 Keynote Address by Bruce Karpati, Sixth Annual Hedge Fund General Counsel Summit (GC Hedge Summit) at the University Club in New York City (Sept. 18-19, 2012), available at The Hedge Fund Law Report, Vol. 5, No. 40 (Oct. 18, 2012).

15 SEC Charges Hedge Fund Managers with Defrauding Investors, SEC Press Release 2012-206 (Oct. 3, 2012), http://www.sec.gov/news/press/2012/2012-206.htm.

16 Speech by Commissioner Luis Aguilar, Taking a No-Nonsense Approach to Enforcing the Federal Securities Laws, Securities Enforcement Forum 2012 (Oct. 18, 2012).

17 "SEC Charges Hedge Fund Adviser and Two Executives with Fraud in Continuing Probe of Suspicious Fund Performance" (Oct. 17, 2012), available at http://www.sec.gov/news/press/2012/2012-209.htm.

18 Keynote Address by Bruce Karpati, Sixth Annual Hedge Fund General Counsel Summit (GC Hedge Summit) at the University Club in New York City (Sept. 18-19, 2012), available at The Hedge Fund Law Report, Vol. 5, No. 40 (Oct. 18, 2012).

19 SEC Enforcement Actions: Insider Trading, available at http://www.sec.gov/spotlight/insidertrading/cases.shtml ("Insider trading continues to be a high priority area for the SEC's enforcement program.").

20 Id.

21 The civil case is SEC v. Kris Chellam, 12-CV-7983 in the U.S. District Court for the Southern District of New York. SEC Litig. Release No. 22523 (Oct. 26, 2012), http://www.sec.gov/litigation/litreleases/2012/lr22523.htm.

22 Complaint at ¶ 1.

23 Id. at ¶¶ 18-19.

24 Id. at ¶ 21.

25 Id. at ¶ 22.

26 Id. at ¶¶ 23-24.

27 Id. at p. 10-11.

28 The civil case is SEC v. Clay Capital Mgmt., LLC, No. 11-CV-05020 in the U.S. District Court for the District of NewJersey. SEC Litig. Release No. 22464 (Aug. 31, 2012), http://www.sec.gov/litigation/litreleases/2012/lr22464.htm.

29 Complaint at ¶ 1.

30 Id.

31 Final Judgment as to Defendant Clay Capital Management, LLC at ¶ I, II, III; Final Judgment as to Defendant James F. Turner II at ¶ I, II, III.

32 Final Judgment as to Defendant Clay Capital Management at ¶ IV.

33 Id.

34 Final Judgment as to Defendant James F. Turner II at ¶ IV.

35 Id.

36 Id.; U. S. v. James Turner, Case No. 2:11-cr-00868 (D.N.J.).

37 SEC Litig. Release No. 22401 (June 27, 2012), http://www.sec.gov/litigation/litreleases/2012/lr22401.htm.

38 The civil case is SEC v. Longoria, No. 11-CV-0753 in the U.S. District Court for the Southern District of New York.

39 Litigation Release No. 22358 (May 8, 2012), http://www.sec.gov/litigation/litreleases/2012/lr22358.htm

40 Id.

41 Id.

42 Id.

43 Id.

44 Id.

45 The civil case is SEC v. Nguyen, 12-CIV-5009 in the U.S. District Court for the Southern District of New York. SEC Litig. Release No. 22401 (June 27, 2012), http://www.sec.gov/litigation/litreleases/2012/lr22401.htm

46 Id.

47 Id.

48 Id.

49 Id.

50 Id.

51 Id.

52 SEC Charges Hedge Fund Managers with Defrauding Investors, SEC Press Release 2012-206 (Oct. 3, 2012), http://www.sec.gov/news/press/2012/2012-206.htm.

53 The civil case is SEC v. Jawed, No. 12-CV-1696 in the U.S. District Court for the District of Oregon. SEC Litig. Release No. 22487 (Sept. 21, 2012), http://www.sec.gov/litigation/litreleases/2012/lr22487.htm.

54 Id.

55 Id.

56 Complaint at ¶¶ 19-24.

57 Id. at ¶ 61-82.

58 Id. at Prayer for Relief I- VI.

59 The civil case is SEC v. Angelo A. Alleca, et al., 1:12-CV-3261 in the U.S. District Court for the Northern District of Georgia. SEC Litig. Release No. 22485 (Sept. 19, 2012), available at http://www.sec.gov/litigation/litreleases/2012/lr22485.htm.

60 Complaint at ¶¶ 2, 20.

61 Id. at ¶¶2, 21.

62 Id. at ¶¶ 22-24.

63 Id. at p. 8-17.

64 Keynote Address by Bruce Karpati, Sixth Annual Hedge Fund General Counsel Summit (GC Hedge Summit) at the University Club in New York City (Sept. 18-19, 2012), available at The Hedge Fund Law Report, Vol. 5, No. 40 (Oct. 18, 2012).

65 The civil case is SEC. v. Yorkville Advisors, LLC et al., 12-CIV-7728 in U.S. District Court for the Southern District of New York. SEC Litig. Release No. 22510 (Oct. 17, 2012), www.sec.gov/litigation/litreleases/2012/lr22510.htm.

66 Complaint at ¶ 1.

67 Complaint at ¶¶ 26-40.

68 Complaint at ¶¶ 44-93.

69 Sec Litig. Release No. 22510 (Oct. 17, 2012).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions