United States:
What Investors in Hedge Funds and Other Investment Funds Should Consider Doing Now
11 January 2009
by
Duane Morris LLP
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Article by
Marvin G. Pickholz ,
Jason R. Pickholz and
David J. Kaufman
Those persons and entities that were direct or
"indirect" investors with Bernard L. Madoff Investments
Securities LLC have been confronted with a myriad of issues
affecting their investments and recovering them. Investors in other
hedge funds or investment funds who are anxious about their
investments may wish to consider the following steps at this
juncture.
- Review any offering materials and private placement memorandum
that were sent at the time of initial investment for a description
of how the fund would be run, what it would invest in, how the fund
managers were to be compensated and any compensation they received
or were to receive from persons other than the investors.
- Review subsequent reports from the fund manager for consistency
with the original descriptions or any alterations in the original
investment objectives and strategies.
- Compare any interim or year-end reports of results of
investments and the financial condition of the fund with the
materials described above.
- Review the audited financial statements and the auditors'
reports of examination and, especially, the footnotes to those
financials for indications of any deviations from the
representations of the nature of the investments, risks, changes in
investment strategies and signs of variances. Confirm that the
auditor has sufficient resources and expertise to audit the
firm.
- Review Internet resources for statements by the fund's
managers and advisors and measure those statements against what was
told to the investors.
- Determine whether, and at what point in time, key employees of
the fund departed. What were their stated reasons for departing and
what explanations were offered by the fund for the departures?
- Review all periodic statements received by the investor from
the fund to determine if investments were consistent with the
representations made and the goals and risk assumption of the
investor.
- Make inquiry of the fund manager as to whether the securities
(and cash) reflected on the monthly statements are held in a
segregated account for the benefit of the particular investor. If
not, ask where they are held. If Securities Investor Protection
Corporation (SIPC) insurance is available, determine whether the
fund managers purchased any other insurance coverage for the
benefit of the investors. If so, ascertain the identity of the
carrier, the amounts of coverage, who must give notice to the
carrier of a loss, and in what manner that notice must be given.
Request a certificate of insurance.
- Ask the fund managers to explain their investment strategies
and concepts and how they have protected investment positions. Ask
how much leverage is being employed in these strategies, how much
of the portfolio is pledged to secure financing and what steps the
manager is taking to reduce risk and exposure at this time.
- Determine how much the fund retains in liquid, readily
available funds to cover redemptions and whether that amount or
percentage has been increased recently.
- If the fund has a board, determine when the board last met, how
frequently it meets, whether it reviews in detail the fund's
cash and securities positions and its trading, risk, and/or due
diligence strategies, and whether and how often it reviews those
strategies with the fund's managers and traders. Request
minutes from these meetings.
- Some funds, such as Madoff's, have overseas operations that
are set up as separate entities in foreign countries that are
subject to the laws of those nations. If the US entity experiences
difficulties, the foreign entity may find that local governments
move in and take over the assets and operations of the foreign
entity to protect their own nationals and sovereign interests.
Those assets may then be unreachable by US investors—at
least without commencing an action in the foreign country, which
would be governed by foreign law. Investors may want to determine
if the fund in which they are invested has such offshore entities,
and where and what the relationships are between the US and foreign
entities.
Interested persons may want to seek legal counsel with respect
to current or new fund investments to determine whether they may
have a risk exposure domestically or abroad and what steps might be
available to address those issues.
If you have any questions regarding this Alert or would
like more information regarding the issues presented above, please
contact any member of the Corporate Practice Group or the attorney
in the firm with whom you are regularly in contact.
This article is for general information and does not include
full legal analysis of the matters presented. It should not be
construed or relied upon as legal advice or legal opinion on any
specific facts or circumstances. The description of the results of
any specific case or transaction contained herein does not mean or
suggest that similar results can or could be obtained in any other
matter. Each legal matter should be considered to be unique and
subject to varying results. The invitation to contact the authors
or attorneys in our firm is not a solicitation to provide
professional services and should not be construed as a statement as
to any availability to perform legal services in any jurisdiction
in which such attorney is not permitted to practice.
Duane Morris LLP, a full-service law firm of more than 650
attorneys, offers innovative solutions across diverse industries in
the United States and internationally to address the legal and
business challenges of today's evolving global
markets.
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