exemption narrowly and arguably increased the range of activities that will be deemed inconsistent with passive investment intentions. Two FTC Commissioners, Maureen K. Ohlhausen and Joshua D. Wright, dissented, as they fear the case may discourage investor advocacy, amongst other things.
Swartz notes that, like Third Point, other hedge funds have fallen foul of HSR because they did not believe their investments had any competition implications and they had no intention of acquiring the investee company. Swartz does not think that the antitrust regulators are "seriously concerned about holdings above the threshold that are not associated with any plans for corporate activity," but cautions that, in a rigidly rules-based regulatory system, the letter and not the spirit of the law is what counts. The crucial point is that "it is a technical rule to comply with, and fines of $16,000 per day can mount up to millions if HSR filings are not made", Swartz warns. Yet another trap for the unwary.
Liability for Investee Company Statements Going beyond HSR disclosures, investors with large stakes can also be deemed to control a company – and are then held responsible for misstatements made by investee companies. In one case, Schiffman successfully brought a motion to dismiss a case where a fund client owned 47 per cent. "The court agreed that the fund did not sufficiently control the issuer", Schiffman is pleased to report.
RULE 105 SHORT SELLING 2015 has continued the pattern of the SEC bringing a number of cases under Rule 105 of Regulation M relating to short selling in advance of a secondary offering. Davis says that there have been "a tremendous number of Rule 105 cases brought against hedge funds, estimating that there have been at least 70 such cases brought since the Rule's adoption". This is a very technical rule, under Regulation M, which prohibits firms shorting a firm commitment underwritten secondary offering during the Rule 105 period (typically five days before its pricing) from participating in the offering (unless one of the Rule's exceptions applies). Like many others, Rule 105 is a strict liability law with no intent or knowledge requirement. Sanctions include not only disgorgement of profits but also penalties that can run into the millions. SRZ sees five to 10 new actions every year, and lawyers there view it as "a trap for the unwary that can easily be landed in, despite benign intent".
BRIBERY AND MONEY LAUNDERING Uncertain Reach of FCPA Often Not Tested in Court The Foreign Corrupt Practices Act (FCPA) remains a focus for both the SEC and the DOJ, with the SEC's Enforcement Division building a dedicated
unit. So far, it has mainly charged non-financial companies, including many non-US companies, with making improper payments to government officials who may have influenced contract wins. But breaches of the act are not clearly defined, and unpaid internships, offered to an offspring of a client, were deemed improper in one case. "No dollar figure determines whether any gifts, entertainment or 'wining and dining' constitutes a bribe. Even small amounts could be viewed as an inducement on the eve of a big deal", Stein warns. Yet gratuities of larger value could be disregarded if there is no quid pro quo. "Ultimately the courts decide if it is a bribe", says Stein – but only if the matter gets to court. Stein is often surprised to see companies settling on the basis of defensible allegations, and he points out that individuals have often won when they have challenged the DOJ.
Expanding Coverage of Anti-Money Laundering (AML) Rules, and Scope of AML Violations THFJ recently published SRZ's Alert on the US Department of Treasury's (DOT) Financial Crimes Enforcement Network's (FinCEN) Proposed Rule for all registered investment advisers to be covered by many aspects of AML rules, including establishing an AML program and making suspicious activity reports. "This is another looming area of potential CCO liability", says Bensky, as RIAs will need to designate an AML compliance officer, who can be held responsible for any shortcomings.
When RIAs are required to comply with AML rules (probably beginning in 2016), AML is likely to be interpreted more imaginatively in relation to other financial institutions. Bensky warns that "AML has been used in an ever increasingly expansive way, with almost anything defined as an AML violation". He adds, "the government has viewed AML violations very broadly to bring actions against sell-side firms, leading to enforcement actions".
Expanding SEC Purview The FinCEN proposals to give the SEC exam authority for AML purposes as part of regular exams also extend the SEC's purview into the realm of criminal law. Daly, who helps firms with examinations, finds this surprising. While the higher-level laws and rules are overseen by the DOJ and FinCEN, "the SEC is now asserting jurisdiction over AML", he says.
FINES AND PRIME BROKER LIABILITY The escalating level of fines, now running into billions of dollars, is perceived as disproportionate in some quarters. Fines go to
the general US Treasury, so, unlike some lawyers seeking damages in civil cases, SEC officials do not have any personal financial incentive to levy fines, nor do fines add to the SEC budget.
Schiffman is not opposed to financial penalties as any matter of principle. Record-breaking corporate fines imposed by the SEC "are fair enough if illicit profits have been made, but in many cases the fine is completely disconnected from any profits made, which means you are punishing the wrong person", he explains. In some cases, firms have even been fined following losses. "In the Knight Capital case, it made a mistake, lost money, and then the shareholder fines of $12 million mean it was punished twice", recalls Schiffman. His argument is simply that fines should be proportionate to profits. "If the corporation did not make any gain, it is bad policy, and makes no sense, to fine it and punish the wrong person". Therefore, Schiffman argues that "the LIBOR fines make no sense, as there was no impact on the marketplace and banks may not have made any money". The motivation for the fines was "a race to the top in fines, to make them bigger and bigger, because regulators know it is hard for the banks to fight their own regulator", he thinks.
Prime Broker Liability If banks and brokers are loath to dispute regulatory fines, they can, and should, fight civil cases. For instance, Schiffman represented Goldman Sachs in a FINRA dispute resolution arbitration brought by hedge fund Walrus Master Fund Limited and Adam D. Sender in 2011. The statement of claim requested more than $60 million in damages and alleged that claimants suffered losses resulting from liquidating securities positions to meet risk calls during the October 2008 financial crisis. The March 2015 arbitration award denied all of the claimant's claims, and assessed forum fees against the claimant, handing Goldman Sachs a resounding victory.
The significance of this case is that, however hostile the broader environment may appear, "there are still situations when a corporate defendant can go to trial and prevail", says Schiffman, who has nearly always seen PBs acting within the terms of their agreements. Even in 2008, Schiffman did not notice any "force majeure" clauses invoked by PBs in order to override the terms of a contract. He has also been on the other side of cases where PBs have not followed terms, and he is litigating one such case now.
Schiffman and SRZ are highly sought after because "we have practiced in the PB space for a long time", he reflects. Schiffman considers SRZ to house "pre-eminent PB lawyers who act for many of the PBs and have tried the most PB cases of anyone". Schiffman has been trying PB cases for over 20 years, all over the United States, including in Arizona and
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