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Pillsbury Investment Funds practice co-leader Ildiko Duckor recently spoke with The Hedge Fund Law Report about the strategies and risks inherent in investing in and managing quant funds, which utilize highly sophisticated computer-based models to automate trading activities and are increasingly popular in the “hyper-connected” trading and investment sector.

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Pillsbury’s Investment Funds & Investment Management (IFIM) group is a vital and strategic part of our platform. We are pleased to announce new leadership and structure for the group.

Partners Kimberly Mann in Washington, DC and Ildiko Duckor in San Francisco will co-lead the IFIM group. The group now integrates all investment management and funds professionals across the firm’s offices. Our interdisciplinary approach also draws on the experience of other practices that enhance the depth and scope of our services to clients. The IFIM group now comprises more than two-dozen business and litigation attorneys in London, Los Angeles, New York, San Francisco, Silicon Valley, Tokyo, and Washington, DC. Together, the group’s experience extends across the following disciplines: manager and fund formation and compliance, private equity, hedge funds, registered funds, tax, ERISA, complex transactions, finance and derivatives, employment, bank regulation, real estate, estate planning, regulatory investigations, and civil and criminal litigation. Our London office provides U.K. legal capabilities and a window into the E.U. Our offices in Tokyo, Beijing and Shanghai provide access to the Asian markets.

Kim Mann has been with the firm for 18 years. She focuses her practice on private  funds, including, formation and maintenance, and represents domestic and international fund sponsors, general partners and fund managers in structuring, organizing and negotiating the terms of private equity, venture capital, mezzanine debt and real estate funds. A significant aspect of her practice also involves representation of institutional investors in private fund investments, direct investments, co-investments and other matters involving alternative investments. She also advises private funds, investment advisers and broker-dealers in matters relating to registration under and regulatory compliance with federal and state securities laws. Her transactional practice includes, among other things, acquisitions and dispositions by entities regulated under the Investment Company Act, the Securities Exchange Act and the Investment Advisers Act.

Before joining Pillsbury, Kim practiced corporate and securities law at Miles and Stockbridge in Baltimore, Maryland.

She is a member of the ALI-CLE faculty and serves on the Regulation D Offerings and Private Placements panel. She is also a Certified Public Accountant.

Ildiko Duckor provides strategic and legal advice for clients in the investment management industry. She has represented hedge fund managers, other investment advisers, dually registered adviser-brokers, commodity pool operators and commodity trading advisors with respect to the structuring, registration, operation and management of their firms, domestic and offshore private funds, and accounts. Ms. Duckor has extensive experience preparing and negotiating agreements for various managed account, funds-of-one and subadvisory arrangements.  She regularly negotiates on managers’ behalf investments by institutional investors (side letters) and seed capital arrangements. Ms. Duckor also counsels her clients on state and federal regulatory compliance matters and helps them develop compliance and internal control policies and procedures.

Ildi Duckor’s prior experience in the investment management area includes both private practice (Schulte Roth & Zabel LLP in New York) and in-house (Barclays Global Investors, N.A., now BlackRock). Previous industry engagements include Chair of the policy committee of the California Hedge Fund Association and membership on the steering committee of the Association of Women in Alternative Investing.

Ailyn Cabico, the group’s experienced legal assistant, continues to assist clients with their Form ADV, regulatory filings and other paralegal needs, including the updates to the Form ADV due on March 31, 2015.  Should you need assistance with these filings, please contact Ailyn at and Ildi Duckor at

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By William M. Sullivan, Jr. and Jay B. Gould

Under the Second Circuit’s new ruling, prosecutors have two large hurdles they must clear to convict under securities laws. First, they must prove that a defendant knew that the source of inside information disclosed tips in exchange for a personal benefit. Second, the definition of “personal benefit” is tightened to something more akin to a quid pro quo exchange.

For years, insider trading cases have been slam dunks for federal prosecutors. The United States Attorney’s Office in the Southern District of New York had compiled a remarkable streak of more than eighty insider trading convictions over the past five years. But that record has evaporated thanks to the United States Court of Appeals for the Second Circuit’s ruling in United States v. Newman, in which the Second Circuit concluded that the district court’s jury instructions were improper and that the evidence was insufficient to sustain a conviction.

The Second Circuit relied upon a thirty year old Supreme Court opinion, Dirks v. SEC, 463 U.S. 646 (1983), and highlighted the “doctrinal novelty” of many of the government’s recent successful insider trading prosecutions in failing to follow Dirks. Accordingly, the Court overturned insider trading convictions for Todd Newman and Anthony Chiasson because the defendants did not know they were trading on confidential information received from insiders in violation of those insiders’ fiduciary duties. More broadly, however, the Court laid down two new standards in tipping liability cases, both likely to frustrate prosecutors for years to come.

Tougher Disclosure Requirements

Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission rules 10b-5 and 10b5-1 generally prohibit trading on the basis of material nonpublic information, more conventionally known as insider trading. In addition, federal law also prohibits an individual (the “tipper”) from disclosing private information to an outside person (the “tippee”), if the tippee then trades on the basis of this private information. This disclosure—a breach of one’s fiduciary duty—is known as tipping liability. As with most crimes, tipping liability requires scienter, a mental state that demonstrates intent to deceive, manipulate, or defraud. In these cases, the government must show that the defendant acted willfully—i.e., with the realization that what he was doing was a wrongful act under the securities laws.

Until last week, willfulness had been fairly easy to show, and that was one of the principal reasons for the government’s string of successes. Prosecutors only had to prove that the defendants traded on confidential information that they knew had been disclosed through a breach of confidentiality. In Newman, however, the Second Circuit rejected this position outright. The Court held that a tippee can only be convicted if the government can prove that he knew that the insider disclosed confidential information in exchange for a personal benefit, and one that is “consequential” and potentially pecuniary.

This distinction may seem minor, but its impact is enormous. The government now must prove—beyond a reasonable doubt, no less—that a defendant affirmatively knew about a personal benefit to the source of the confidential information. From the prosecution’s perspective, this is a massively challenging prospect.

Tightened “Personal Benefit” Standards

The Second Circuit also clarified the definition of “personal benefit” in the tipping liability context. Previously, the Court had embraced a very broad definition of the term—so broad, in fact, that the government argued that a tip in exchange for “mere friendship” or “career advice” could expose a trader to tipping liability.

The Court retreated from this position and narrowed its standard. Now, to constitute a personal benefit, the prosecution must show an exchange “that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature” —in other words, something akin to a quid pro quo relationship. This, too, complicates a prosecution’s case significantly.

Implications of the Ruling

What effect will this ruling have moving forward? Of course, one effect is obvious from the start: prosecutors are going to have a much more difficult time proving tipping liability. But as with many new appellate cases, it may take some time to see how this rule shakes out on the ground in the trial courts. Here are a few things to keep in mind over the next few months and years.

  • This ruling may cause some immediate fallout. For example, there are currently several similar cases in New York that are pending for trial or appeal, and these may now result in acquittals or vacated convictions. In fact, some defendants who previously took guilty pleas in cooperation with Newman and Chiasson’s case are considering withdrawing their pleas in light of this decision. Moving forward, look to see the SEC and potential defendants adjusting their behavior and strategies in light of this ruling. In fact, just this week, a New York Federal Judge expressed strong reservations about whether guilty pleas entered by four defendants in an insider trader case related to a $1.2 billion IBM Corp. acquisition in 2009 should remain in light of Newman.
  • This is also welcome news for tippees who did not interact directly with the source of the inside information. Although the source of the leak may still be prosecuted as usual, this ruling may shield a more remote party from an indictment. As the Newman court noted, the government’s recent insider trading wins have been “increasingly targeted at remote tippees many levels removed from corporate insiders.” Now, without clear evidence that the insider received a quantifiable benefit and that the tippee was aware of such benefit for providing the information, cases against such “remote tippees” will be tremendously more difficult to prove.
  • But, caution should still reign where tippees deal more directly with tippers. The tippees in this case were as many as three or four steps removed from the tippers. It is not difficult to imagine the Court coming out the other way if Newman and Chiasson had been dealing with the tippers themselves.
  • One enormous question mark is to what extent the standards expressed in this case will affect the SEC’s civil enforcement suits. We will have to wait and see, but traders should still use caution. Because civil suits require a substantially lower burden of proof and lesser standard of intent compared to criminal cases, it is possible that these new rules may offer little protection from a civil suit. Additionally, SEC attorneys will probably emphasize this distinction to courts in an attempt to distinguish their enforcement suits from Newman and Chiasson’s criminal case, but whether this tactic is effective remains to be seen.
  • Although the Court refined the meaning of a personal benefit, the definition is still purposefully flexible. This case tells us that abstract psychic benefits—friendship, business advice, church relationships—are not enough, but what about anything just short of exchanging money, favors, or goods? We don’t yet know, and for that reason clients should exercise care.
If you have any questions about the content of this alert,   please contact the Pillsbury attorney with whom you regularly work, or the   authors below.
Jay B. Gould (bio)San Francisco


William M. Sullivan (bio)Washington, DC



The authors wish to thank Robert Boyd for his valuable assistance with this client alert.


About Pillsbury Winthrop Shaw Pittman LLP
Pillsbury is a full-service law firm with an industry focus on energy & natural resources, financial services including financial institutions, real estate & construction, and technology. Based in the world’s major financial, technology and energy centers, Pillsbury counsels clients on global business, regulatory and litigation matters. We work in multidisciplinary teams that allow us to understand our clients’ objectives, anticipate trends, and bring a 360-degree perspective to complex business and legal issues—helping clients to take greater advantage of new opportunities, meet and exceed their objectives, and better mitigate risk. This collaborative work style helps produce the results our clients seek.

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Written by: James Campbell and Sam Pearse

And so Greece paid the bond repayments due on Tuesday.  Some claim that making such a payment was a no-brainer on the basis that the otherwise ensuing litigation and cross-defaults on other bonds was unthinkable.  Other sources claim that the noise coming from Greece over last weekend was that the payment would be made and that it was never in doubt.  Yet initial Reuters reports on Tuesday morning of the bond repayment remained unconfirmed for a number of hours, with the payment due to be made in the afternoon.

There remains a large amount of unstructured, foreign law governed bonds and the holders of those instruments will take the view that there is now a commercial precedent for not agreeing to restructure the debt. Those who agreed to a 70 percent haircut on their bonds will be understandably furious and considering their options.  Either way, the decision to repay the bonds in full will have serious repercussions for any future debt restructuring and the sovereign bond market as a whole.  The system only works if bondholders can trust sovereigns.

The repayment of the capital has done nothing to dispel the unease about an imminent Greek exit from the Eurozone.  The arguments remain the same as before and can be captured under the heading of the cost of exit versus the cost of remaining propped up.  However, it is the not the debt writedowns, the cost of introducing a new currency or the unpicking of contracts that is the major concern.  We are seeing continued capital flight from the Eurozone as confidence continues to wane.  It is clear that contagion is spreading.

Is Greece the sea anchor that is dragging down the rest of the Eurozone?  The dumping of Italian and Spanish bonds and the selling of banking stocks in the Eurozone countries certainly evidences the contagion.  Indeed, it is Spain that appears to be the next country with a serious problem.  There are serious questions about the financial strength of the Spanish banks which have not yet be answered. The next bond sale is on Thursday May 17 and the expectation is that the cost of borrowing will markedly rise, especially as it was the Spanish banks that were the principal buyers of Spanish bonds last time around.

If Greece’s troubles remain inadequately “firewalled” from the rest of the Eurozone then other vulnerable countries will continue to be dragged down.  If Greece alone defaulted that may be manageable, especially as external exposure to Greece’s well flagged troubles have been cut back over the past two years.  But if Greece goes and takes some or all of Spain, Portugal, Italy and Ireland with it then there is exponential damage that even the green shoots of recovery in the US may not withstand.  The longer Greece remains part of the Eurozone, the greater the likelihood that there will be widespread collapse.  For that reason, at the very least in the short term, funds should be reviewing their Spanish strategy and the terms of any Spanish paper they hold.

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Written by: Samuel Pearse and James Campbell

In the grand scheme of Greece’s debt problems, the sum of approximately €450m may appear modest but tomorrow (15 May) the next repayment of principal is due on foreign law bonds issued by the Hellenic Republic.  In a high stakes version of Morton’s Fork, whether the fractured Greek government decides to pay or default there are potentially undesirable outcomes.

As the bonds due for repayment are governed by English law the Greek government will find it difficult to impose its own will upon the bondholders.  Followers of the crisis will recall that Greece forced through the restructuring of Greek law governed bonds by enacting new legislation, with retrospective effect, that allowed the government to enforce collective action clauses.  They have no such power with foreign law bonds.  At the end of March, Greece put a restructuring proposal to the holders of the outstanding 36 foreign law bonds, and in 20 cases the proposal was not passed, including the bond due for repayment tomorrow.

Greece finds itself with a stark choice: default or pay up.

Default and Greece can expect the holders of the bonds to give their lawyers the green light to prepare lawsuits to be filed on the expiry of the 30 day cure period.  Add to the mix the inevitable arguments concerning breaches of negative pledges within the foreign-law debt instruments, and also creditors seeking to attach other assets under the emanation principle, and Greece will find itself embroiled in far-reaching and long-running litigation, leaving aside the questions of continued membership of the Eurozone.

Should Greece pay then it would be seen as a victory for the hold-out strategy, emboldening the holders of the other 19 foreign law bonds which have not been restructured.  We could also see protests from those bondholders who agreed to a debt restructuring on the basis that Greece said that there was no money available to doing anything else.  Such “co-operative” bondholders may explore the possibility that such misrepresentations are actionable.

Either way, holders of Greek bonds should be considering their strategies and preparing for either outcome.  As John Dizard eloquently comments in today’s Financial Times (‘Holdouts get paid, the rest can pray’, Financial Times, Monday May 14 2012) “The under-lawyered should look for spiritual, not financial, comfort”.


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Written by Peter J. Chess

On November 30, 2011, FINRA and the SEC’s Office of Compliance Inspections and Examinations (OCIE) released a National Exam Risk Alert on effective procedures and policies for broker-dealer branch inspections. This follows other recent guidance for broker-dealers regarding the Market Access Rule and reasonable investigations in Regulation D Offerings, in addition to recent FINRA sanctions against broker-dealers related to Regulation D Offerings.

Under Sections 15(b)(4)(E) and 15(b)(6)(A) of the Exchange Act, the SEC can impose sanctions on any firm or any person that fails to reasonably supervise someone subject to supervision that violates the federal securities laws. A broker-dealer can defend such a charge with a showing of effective procedures and policies designed to prevent and detect potential violations.

The National Exam Risk Alert jointly released on November 30 by FINRA and the OCIE (“November 30 Alert”) concerns broker-dealer branch inspections which are required by the Exchange Act and FINRA rules. Examination staff have observed that firms that execute these inspections well typically:

  • tailor the focus of branch exams to the business conducted in that branch and assess the risks specific to that business;
  • schedule the frequency and intensity of exams based on underlying risk;
  • engage in a significant percentage of unannounced exams selected based on both risk analysis and random selection;
  • deploy sufficiently senior branch office examiners to conduct the examinations; and
  • design procedures to avoid conflicts of interest with examiners.

The November 30 Alert also lists typical findings about firms with deficiencies in their inspection process, including the utilization of generic examination procedures for all branch offices; the use of novice or unseasoned branch office examiners; the performance of “check the box” inspections; and, the lack of adequate procedures and policies.

The November 30 Alert is the second such Alert released this quarter by the OCIE. On September 29, 2011, OCIE released a National Exam Risk Alert  (September 29 Alert) regarding the master/sub-account structure and potential risks of noncompliance for broker-dealers with the recently adopted Rule 15c3-5 (the Market Access Rule).

The Market Access Rule requires broker-dealers to have a system of risk management control and supervisory procedures reasonably designed to manage the financial, regulatory and other risks of the business activity associated with providing a customer or other person with market access. Deficiencies in risk management control and supervisory procedures raise significant regulatory concerns with respect to money laundering, insider trading, market manipulation, account intrusions, information security, unregistered broker-dealer activity, and excessive leverage.

Recent FINRA Enforcement Actions Against Broker-Dealers

On September 29, 2011, FINRA also announced it had sanctioned another eight firms and ten individuals and ordered restitution totaling more than $3.2 million due to violations related to private placements. FINRA previously announced similar sanctions against broker-dealers in April 2011, and the most recent announcement brings the total to ten firms and seventeen individuals sanctioned by FINRA since April for involvement in problematic private placements.

The sanctions stem from a variety of issues uncovered by FINRA related to firms selling private placement offerings, including the lack of a reasonable basis for recommending the offering; failure to conduct a reasonable investigation of the offering; failure to have adequate supervisory systems in place; failure to conduct adequate due diligence of offerings; lack of reasonable grounds regarding the suitability of the offering for customers; and, lack of reasonable grounds to allow registered representatives of firms to continue selling the offerings, despite numerous “red flags.”

These sanctions follow FINRA’s release of a Regulatory Notice in April 2010 (“April 2010 Notice”) regarding the obligation of broker-dealers to conduct reasonable investigations in Regulation D, or private placement, offerings. The April 2010 Notice provided guidance on many of the issues at the heart of the recent sanctions by FINRA related to private placements. The April 2010 Notice noted that broker-dealers had many requirements triggered by private placement offerings, including: a duty to conduct a reasonable investigation concerning the security and the issuer’s representations about it; a duty to possess reasonable grounds to recommend transactions that are suitable for the customer; and, other specific responsibilities that could be triggered based on specific factors with each transaction.

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Written by Michael Wu

Market regulators in France, Italy, Spain and Belgium, in coordination with the European Securities and Markets Authority (ESMA), have decided to extend their current short selling ban that was enacted on August 11, 2011.  A summary of the action taken by each regulator is summarized below.

France.  The Autorité Des Marchés Financiers (“AMF”) extended the ban until November 11, but will determine whether to lift the ban by the end of September.  The AMF press release can be found here.

Italy.  The Commissione Nazionale per le Società e la Borsa (“Consob”) extended the ban until September 30.  The Consob press release can be found here.

Spain.  The Comisión Nacional del Mercado de Valores (“CNMV”) also extended the ban until September 30.  The CNMV press release can be found here.

Belgium.  The Financial Services and Markets Authority (FSMA) is continuing its indefinite ban on short selling.

In addition, Greece’s Hellenic Capital Market Commission (“HCMC”) will reassess before the end of September its current short selling ban that is in effect until October 7.  The HCMC press release can be found here.

Other European countries have not implemented a short selling ban.

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Written by Michael Wu

Pillsbury recently conducted a survey of nearly 200 individuals involved in operating and investing in mid-sized Chinese companies.  The results revealed that 55% expect to seek financing within the next 24 months and 43% expect to do so this year.  The survey also confirmed that Chinese executives believe that the U.S. still offers the most opportunities for foreign expansion.  Thirty-eight percent of respondents said the U.S. and Canada offer the most opportunities for foreign expansion, while 26% said that other parts of Asia, including Australia and New Zealand, offered the most opportunities, and 11% favored Latin America.  In terms of capital market financing, Chinese executives felt by a wide margin (42%) that an IPO or other public offering was the most effective way to raise capital, followed by a PIPE transaction (24%) and bank financing (22%).  Just 12% thought a convertible debt financing the most effective.  Please click here to view our press release and here to view the full survey.

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Written by Michael Wu

On December 7, 2010, the Securities and Exchange Commission (the “SEC”) proposed joint rules with the Commodity Futures Trading Commission (the “CFTC”) to define the types of swap traders that would be subject to the new derivatives regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  The proposed rules attempt to implement the provisions of the Dodd-Frank Act, which established a comprehensive framework for regulating the over-the-counter swaps market.

The Dodd-Frank Act creates new categories of market participants that are subject to registration, capital and margin, record keeping, reporting and other regulatory requirements.  The proposed rules define the categories of market participants that would be deemed “Security-Based Swap Dealers” and “Major Security-Based Swap Participants.”

  • Security-Based Swap Dealers.  Under the Dodd-Frank Act, a Security-Based Swap Dealer is any person that holds itself out as a dealer in security-based swaps, makes a market in security-based swaps, enters into security-based swaps with counterparties in the ordinary course of its business, or is commonly known in the trade as a dealer or market maker in security-based swaps.  The CFTC proposal would exempt a firm from registration as a Security-Based Swap Dealer if (i) its notional aggregate amount of security-based swaps in the prior 12 months did not exceed $100 million (of which only $25 million can be with “special entities” as defined in the Commodity Exchange Act), (ii) it did not enter into security-based swaps as a dealer with more than 15 counterparties (other than security-based swap dealers) in the prior 12 months, and (iii) it did not enter into more than 20 security-based swaps as a dealer in the prior 12 months.
  • Major Security-Based Swap Participants.  Under the Dodd-Frank Act, a Major Security-Based Swap Participant is any person that is not a Security-Based Swap Dealer and has (i) a “substantial position” in any major security-based swap categories (held other than for hedging or mitigating risk), (ii) whose security-based swaps create “substantial counterparty exposure,” which could have a serious adverse effect on the financial stability of the United States banking systems or financial markets, or (iii) is a “financial entity” that is “highly leveraged” and that has a substantial position in any of the major security-based swap categories.
    • The CFTC proposed that a firm has a “substantial position” in swaps if it (i) has a daily average or current uncollateralized exposure of at least $1 billion on a net basis for credit, equity or commodity swaps or $3 billion for rate swaps, or (ii) has a daily average of current uncollaterized exposure and future exposure of at least $2 billion for credit, equity or commodity swaps or $6 billion for rate swaps.
    • The CFTC proposed that a firm has “substantial counterparty exposure” if it has uncollateralized exposure of more than $5 billion or current and future exposure exceeding $8 billion.
    • The CFTC proposed that a “financial entity” be defined under Section 3C(g)(3) of the Securities Exchange Act of 1934, as amended.
    • The CFTC proposed two definitions of “highly leveraged”; the first is an 8 to 1 ratio of total liabilities to equity determined in accordance with US GAAP and the second is a 15 to 1 ratio of total liabilities to equity determined in accordance with US GAAP.

In addition, the proposed rules permit clearinghouses to provide portfolio margining of futures and securities in futures accounts.  The proposed rules also require Security-Based Swap Dealers and Major Security-Based Swap Participants to keep daily trading records regarding the security-based swaps and all related records, which would be open to inspection by the CFTC.  The CFTC and the SEC are expected to vote on the final rule in July of 2011.