Harry S. Davis

A Look Across The Pond: Uncle Sam’s Recent Enforcement Actions And Civil Litigation Update Concerning Hedge Funds

Statistics: Incidents of Misconduct

0

5

10

15

20

25

30

35

'00 '01 '02 '03 '04 '05 '06

6

Year

Number of Cases

6 79 8

12

34

12

Current Enforcement Landscape

• Valuation Fraud• Misappropriation of Assets• Insider Trading• Market Manipulation• Violations in Connection

with Securities Offerings• Naked Shorting• Market Timing/Late

Trading• Hedge Fund Marketing• Antitrust Issues

Types of Enforcement Actions Against Hedge Funds

The SEC’s PIPEs Investigation

• Broad Ranging, Industry-Wide Investigation

• Civil and Criminal• Hedge Funds,

Placement Agents and Individuals

The SEC’s PIPEs Investigation

• Genesis– Complaint By Mutual Fund To SEC

– Noticed Significant Price Erosion Prior To Announcement Of PIPE

• The Investigation Begins– OCIE: 22 Placement Agents/Brokers/Bankers Get

Requests For Information• Identify Deals

• Who Knew About Them, What Did They Know, And When?

• Investigation Heats Up: Enforcement Involved– Focus Turns To Hedge Funds

The SEC’s PIPEs Investigation

• Insider Trading Claims– Shorting After Knowledge of PIPE

– Claim Based, At Least In Part, Upon Promise Not To Engage In Shorting Activities

• Market Manipulation– The “Death Spiral”: Shorting For The Purpose Of

Driving Price Down Prior To Conversion

– Hiding Trades From Market

– Failure To Deliver

– Matched Orders and Wash Sales

The SEC’s PIPEs Investigation

• Other Issues– Public Disclosure: How Long Do You Have To

Wait Before Shorting?

– Not Covering Short Position With Newly Registered Shares

– Properly Unwinding Positions

– Pre-Arranging Borrow

– Investment Intent

The Civil Litigation Landscape

• Claims Against Redeeming Investors– Manhattan Investment Fund

– Lancer

– Bayou

• Theories of Liability– Fraudulent Transfer

– Preference

– Unjust Enrichment

The Civil Litigation Landscape

• Purportedly False Research Reports Procured By Hedge Funds: Issuers v. The Shorts– Overstock.com

– Biovail

– Fairfax

• Theories of Liability– RICO

– Disparagement

– Tortious Interference