The Capital Commitment

Proskauer on Private Equity Litigation

Proskauer Private Investment Funds Group Releases 2018 Annual Review and Outlook

Proskauer’s Private Investment Funds Group today released its 2018 Annual Review and Outlook for Hedge Funds, Private Equity Funds and Other Private Funds.  This yearly publication provides a summary of some of the significant changes and developments that occurred in the past year in the private equity and hedge funds space, as well as certain recommended practices that advisers should consider when preparing for 2019.

Highlights from the annual review include:

  • A summary of SEC examination priorities and enforcement developments impacting the private funds industry, including fees and expenses, allocation of investment opportunities and conflicts of interest;
  • A review of the continued evolution of whistleblower law, including an overview of the Supreme Court’s ruling on the definition of “Whistleblower,” the first overseas whistleblower awards and proposed changes to the SEC’s whistleblower rules;
  • An analysis of the current state of insider trading law, including an analysis of the Second Circuit’s approach to the personal-benefit requirement in United States v. Martoma and the potential for securities fraud liability even without personal benefits or a fiduciary breach;
  • U.S. and U.K. tax updates, including an overview of the comprehensive U.S. tax bill signed into law in December 2017;
  • An extensive review of employment law developments at the federal and state level potentially impacting advisers, including legislation since the beginning of the #MeToo movement aimed at eliminating sexual harassment and abuse in the workplace;
  • A review of big data, web scraping and other issues in data science, including a discussion of the applicability of the Computer Fraud and Abuse Act to data scraping;
  • Developments relating to the regulation of cryptocurrencies, tokens and other digital assets, including the CFTC’s authority to regulate cryptocurrencies and the SEC’s intention to regulate tokens (often referred to as initial coin offerings or ICOs) as securities;
  • Regulatory developments in the European Union, including an update on the still uncertain Brexit process and a review of the Alternative Investment Fund Managers Directive II and the General Data Protection Regulation; and
  • A comprehensive overview of required U.S. regulatory filings across the many agencies overseeing the private funds industry, including a quick reference table for monthly filings in 2019.

WSJ Article on Geolocation Data Highlights Risks for Fund Managers

On Friday, the WSJ published an article detailing how companies are monetizing smartphone location data by selling it to hedge fund clients.  The data vendor featured in the WSJ article obtains geolocation data from about 1,000 apps that fund managers use to predict trends involving public companies.  However, as we’ve noted, the use of alternative data collection for investment research purposes may give rise to a host of potential issues under relevant laws. Continue Reading

Bharara Task Force on Insider Trading

Former SDNY U.S. Attorney Preet Bharara and SEC Commissioner Jackson recently announced, via NY Times op-ed, the creation of the Bharara Task Force on Insider Trading.  Based on the premise that U.S. insider trading laws are unclear and hopelessly out of date, the task force intends to propose new insider trading reforms to help clarify the laws and protect American investors.

Jackson and Bharara recognize that individuals facing liability should have more clarity about what the law is.  For those of us who regularly advise fund managers on compliance with insider trading rules, more clarity would be a welcome development.

Continue Reading

SEC Extends Registration Requirements for Investment Companies and Broker Dealers to ICOs and other Digital Assets

Fund managers take note – after over a year of warning, this month the SEC announced a pair of settlement orders with respect to registration requirements for a fund and broker dealer operating in the crypto and digital assets space. It was the agency’s first ever enforcement actions applying the investment company and broker-dealer registration provisions of the securities laws to businesses involved in digital securities. As we’ve written on Proskauer’s Blockchain and the Law blog, we expect to see the SEC continue to expand its oversight of digital assets as securities. Continue Reading

Mt. Gox Debacle Showcases Cryptocurrency Litigation Concerns

The theft of millions of bitcoins and related failure of cryptocurrency exchange Mt. Gox—recently written about in the Wall Street Journal—provides a perfect example of how cryptocurrency-related issues can blossom into one of our Top Ten Regulatory and Litigation Risks.  The WSJ article chronicles the journey of Kim Nilsson—one of the victims of the $400 million bitcoin theft from Mt. Gox in 2014—as he investigates and eventually uncovers the identity of the hacker who stole his bitcoins.  During his investigation, Mr. Nilsson discovered another concern—one potentially ripe for dispute:

Mt. Gox had been concealing bitcoin thefts that occurred as far back as 2011 and had been insolvent since at least 2012—two years before it filed for bankruptcy.

Historically, investors and other transferees could be subject to clawback actions where they profited from “false profits,” which had been paid using proceeds from other harmed investors, during periods of insolvency—as demonstrated in Madoff and other frauds.  Given that Mt. Gox was reportedly insolvent years before its bankruptcy petition in 2014, this may spell trouble for investors that cashed out at values above their initial investment cost during the undisclosed period of bitcoin thefts.   In essence, investors who cashed out during the period of insolvency may have received more money than they were entitled to receive, depending on the applicable law.

Mt. Gox should serve as a warning to investors in cryptocurrencies, as fraud and insolvency involving cryptocurrency-related investments or businesses is unlikely to diminish.  Myriad complex issues will arise with respect to the applicable law and the rights and duties of those involved.  The good news is that in the U.S., the law adapts to new circumstances using historical concepts.  The bad news is that the evolutionary process can be rocky and difficult to predict, making it difficult to risk-weight outcomes.  Thoughtful participants in these sectors should assume that Mt. Gox foreshadows a larger trend of fraudulent conduct and resultant litigation, given cryptocurrencies’ meteoric rise and potentially rapid declines.  More specifically, fund managers and others involved in cryptocurrency-related investments should keep in mind clawback actions, and be prepared for disputes.

SEC Enforcement Co-Director Gives Guidance for Wells Process, Part 2

On June 4, we posted a summary of SEC Enforcement Co-Director Steven Peikin observations during his recent keynote address at the New York City Bar Association’s 7th Annual White Collar Crime Institute.  Co-Director Peikin imparted a few suggested “do’s and don’ts” for effective communication with the SEC during the Wells process.  Although Co-Director Peikin’s suggestions should serve as helpful guides to defense counsel, we believe a few of the observations bear further consideration.

Read our full summary of his observations on our Corporate Defense and Disputes blog.

SEC Enforcement Co-Director Gives Guidance for Wells Process

During his recent keynote address at the New York City Bar Association’s 7th Annual White Collar Crime Institute, SEC Enforcement Co-Director Steven Peikin imparted a few suggested “do’s and don’ts” for effective communication with the SEC during the Wells process—typically the last opportunity to address potential charges prior to the authorization of a SEC enforcement proceeding.

Read our full summary of his observations on our Corporate Defense and Disputes blog.

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