Category Archives: Hedge Funds

An Insider Trader’s View on the Compliance Needed to Stop Insider Trading

by Tom Hardin

“It is one of the biggest mysteries on Wall Street: Who is Tipper X, the secret witness at the center of the biggest insider-trading case in a generation? The answer is Thomas Hardin — a young investment analyst who, the authorities claim, traded on inside information and may now lead prosecutors to other crucial players…” – New York Times, January 12, 2010

In 2007, while working at a small hedge fund as a 29-year-old technology stock analyst, I received material nonpublic information (MNPI) from another investor on four occasions; three tips regarding upcoming corporate M&A deals and one tip with information about a company’s quarterly earnings announcement. I placed four trades in those shares (in my mind “small” trades). I did not hesitate to make the trades as trading on MNPI seemed rampant within the technology and healthcare stock analyst communities at the time. One well-regarded tech stock focused hedge fund had several of their largest 2006 winning positions as targets of corporate takeovers. Ultimately, my faulty rationalizations led to a career ending, life-altering situation. In July 2008, I was approached by FBI agents on the street outside my apartment and given the chance to help them build larger cases. I became known as “Tipper X” and was credited with helping the FBI build over 20 of the 80+ cases in Operation Perfect Hedge, a Wall Street house cleaning campaign that morphed into the largest insider trading investigation of a generation. Continue reading

Creating a Culture of Compliance

by Michael C. Neus

Many constituents have a vested interest in determining a firm’s culture of compliance:  regulators, investors, prospective employees, among others.  Investment advisers registered with the Securities and Exchange Commission must demonstrate their compliance culture during periodic examinations by the Office of Compliance, Inspection and Examinations.  Current and former SEC examination staff often state that the primary indicator of a healthy compliance culture is the “tone from the top.”  There are a number of steps that a firm can take to demonstrate that top management fosters an effective compliance culture. Continue reading

Roadmap to an Effective Annual Review

by Michael C. Neus

As the year ends, SEC registered investment advisers to private funds start considering how to assess their firm’s compliance culture.  The Advisers Act of 1940 requires a formal annual review of the adequacy of “written policies and procedures reasonably designed to prevent violation of securities laws.”[1]  In other words, every year Chief Compliance Officers ask themselves how they can actually demonstrate their effectiveness.

Rather than viewing this process as a comprehensive narrative report identifying all deficiencies, perhaps a more useful construct is to think of the annual review as a way of collating and assessing activity throughout the year.  Paradoxically, assembling information used throughout the year makes the process easier than attempting a comprehensive one-shot evaluation.[2]   Effective annual reviews are more like a movie than a photograph. Continue reading

Mitigating Legal and Regulatory Risks in Winding Down Funds

by Michael C. Neus

A fund manager typically spends most of its time not only contemplating how to maximize returns for investors, but also navigating the array of compliance and regulatory concerns involved in running a private fund. Because the manager is so caught up in thinking about these daily considerations, it may lose sight of the multitude of issues that arise when it comes time to wind down that same fund. If the manager exercises some foresight regarding the fund’s eventual wind-down and puts proper procedures in place, however, the whole process can be both smoother and less fraught with legal and regulatory risks. Once a manager decides to wind down a fund, it must navigate myriad considerations and decisions during the process. Continue reading