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HedgeCo.net News -Based on the new Dodd-Frank Act that was just signed into law last week by President Obama, new legislation allows the SEC to award huge sums to whistleblowers in insider-trading cases such as the one against hedge fund Pequot Capital Management.

“As of this past Friday, the SEC now has greater ability to extract information from employees of corporations and others involved with those employees.” Ed Tomko, head of the White Collar Crime practice at Curran Tomko Tarski, announced.

On Friday, a payment was made by the SEC to Karen and Glen Kaiser who provided documents that helped the SEC build its case against Arthur J. Samberg, founder of the Pequot hedge fund and David E. Zilkha, a former Microsoft employee.

“This has broad reaching implications for public companies as well as businesses operating in the financial sectors,” said Tomko. “This is the largest amount awarded by the SEC to whistleblowers in an insider-trading case.”

As a result, there is the potential now for whistleblowers to be enticed by lucrative fees they will receive for providing information to the government. This can become a slippery slope for businesses. This can now provide possibly a powerful incentive for an employee or individual related to an employee who know of a securities violation to contact the SEC and provide information that may lead to a large payment in exchange for the information.

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Donald A. Steinbrugge (Feb, 2010) via HedgeCo : The SEC has changed its position with regard to third party marketing firms and is exploring legislation that indicates that the SEC is apparently willing to reconsider its recommendation that all third parties be banned from soliciting government business.

SEC Director Andy Donahue has asked FINRA’s Robert Ketchum for help in crafting legislation that is designed to curb pay for play activity while protecting the role of third party marketing firms. The SEC changed course, at least in part, because of an outcry of response from a wide spectrum of investment professionals, that articulated the positive role that third party marketing firms play in the industry.

The SEC had originally signalled that it intended to ban third party marketing to public pension plans in the wake of the New York State Common Retirement Fund pay-for-play fiasco. While eliminating pay-for-play activities is laudable, the SEC’s original course of action completely ignored the positive impact that third party marketing has on the investment decision making process. Based on numerous complaints that the SEC received that articulated the positive impact that third party marketing firms play throughout the investment process, the SEC reversed course and asked for FINRA’s help in crafting legislation that would curb pay for play activities, but protect the role of third party marketing firms.

As you may recall, in early 2009, David J. Loglisci, former chief investment officer of the New York State Common Retirement Fund, and Henry Morris, (former chief political adviser and chief fundraiser for former New York State Comptroller Alan Hevesi), were indicted on 123 charges, including enterprise corruption, securities fraud, grand larceny, bribery and money laundering.

Following the indictment, New York state Attorney General Andrew Cuomo promised to eliminate the use of third-party marketers in the public pension allocation process. As the nation’s third largest pension plan, the Common Fund wields significant influence in the pension industry. Unfortunately, the initial debate regarding third party marketing firms was framed in part by the Common Fund and others who committed wrongdoing, who chose to deflect blame from themselves and their deficient internal governance practices onto others.

I am delighted that during its due diligence the SEC has listened to the outcry from investment professional and now recognizes the important role that third party marketing firms play in the industry. If the SEC had followed the New York State Attorney General’s recommendation to ban third party marketing, the marketplace would likely sustain far-reaching negative consequences without resolving the breach of fiduciary duty and public trust that is alleged. I will go into greater detail regarding the benefits that third party marketing firms bring to the process later in the discussion.

While I applaud the SEC’s decision to reconsider its course of action, I would encourage the SEC and FINRA to adopt a series of measures.

First, I would require all marketing professionals that call on public funds to be registered with FINRA, whether they are employed with third party marketing firms or employees of alternative investment firms.

This measure will level the playing field for everyone soliciting business with public funds. Second, I believe that greater transparency including fee disclosure be required of all third party marketing firms. THIRD, I would also suggest a ban on political contributions from third party marketing firms and all alternative investment firms seeking to do business with public funds. Finally, I would expect that strict policies regarding Travel and Entertainment Expenses of all third party marketing firms be enforced by FINRA. Effective legislation combined with rigorous enforcement will protect the positive role that third party marketing firms bring to the table and protect the broader interests of all market participants.

The State of New York Common Retirement Fund pay for play disaster serves to remind us that we have no outright protection from fraud and unethical behavior in our society. However, we do have powerful regulatory bodies capable of enacting and enforcing laws that promote ethical and responsible behavior. I am encouraged that the SEC has solicited feedback and is apparently willing to be thoughtful in its approach to third party marketing firms.

The value that third-party marketers add to the allocation process is manifold. Third-party marketers act in the role of an investment bank by raising capital for many private equity firms, hedge funds and other organizations in the alternative investment arena. Third party marketing firms are paid a fee for their efforts, typically a percentage of assets raised or a percentage of all fees generated by the investment in the future. The elimination of third-party marketers would likely cause many of these alternative investments firms to close their doors while simultaneously creating a higher hurdle rate for new managers considering entry into the business. It would also disproportionately harm minority- and woman-owned firms, which tend to be smaller. Many small and medium-sized hedge funds and private equity firms provide seed capital to start-up and small businesses and are an integral part of the global economy’s shadow banking system. Small businesses represent a significant portion of our country’s job growth and are the backbone of our nation’s economic competitiveness on a global scale. Retarding the growth of the nation’s shadow banking system, during a time when traditional banks and lending institutions are less active, will likely have negative consequences for the market.

In sum, third party marketers contribute to the health and existence of the alternative investment arena, which in turn provides capital for the global economy and increases market efficiency. Banning third-party marketers from the investment process would also shrink the opportunity set for investors and speed the migration of investor’s capital to the largest hedge funds and private equity firms, who can afford large marketing infrastructures. Many would argue that compared with their smaller brethren, larger organizations are not able to generate the same returns as their smaller, more nimble competitors, which would negatively impact market efficiency. Given that small and mid-size hedge funds and private equity firms have the potential to generate a significant amount of alpha, any legislation that impacts their existence should be carefully considered. Hedge funds can choose to build their own sales teams, outsource the fundraising effort to a third-party marketing firm, or choose a hybrid approach.

There are some important distinctions between third-party marketing firms and in-house sales staff. Third-party marketers are required to be licensed and regulated by the SEC and FINRA. These firms are heavily regulated and are required to follow all rules and regulations. Most hedge funds are not regulated and their internal sales people in many cases are not licensed. As it now stands, third-party marketers face a much higher degree of regulatory scrutiny than hedge funds that have not voluntarily registered with the SEC. Another critical role played by third-party marketers is the screening of the manager universe. The best third-party marketers perform extensive due diligence before making the decision to represent a hedge fund. In some cases, third-party marketers represent less than 1% of the firms on which they perform due diligence. If one of the firms they are representing becomes less marketable for any reason, they have the option to focus their efforts on the other managers they represent.

All of the reasons articulated above suggest that the SEC is wise in its most recent efforts to explore a framework of rules and regulations that protect third party marketing firms and market participants.

I am pleased that the SEC has listened to the marketplace and recognizes the value that third party marketing adds to the investment process. The SEC’s appreciation of the role that third party marketers play and its request for help from FINRA to create rules that will level that playing field for all of us is welcomed.

Donald A. Steinbrugge is managing member of Agecroft Partners LLC, a Richmond, Va.-based consulting and third-party marketing firm specializing in hedge funds and other alternative investments.

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HedgeCo News – The Financial Industry Regulatory Authority (FINRA) has permanently barred a former Deutsche Bank broker from the securities industry for manipulating the price of Monogram Biosciences (MGRM) stock in an effort to enrich a hedge fund client, himself and his family.

A FINRA panel found that Edward S. Brokaw was engaged in a pattern of trading designed deliberately to drive the value of MGRM stock down and, in turn, drive up the value of contingent value rights (CVRs) on that stock.

According to FINRA, Brokaw`s hedge fund client held approximately 18.5 million CVRs – nearly 30 percent of the 64.8 million MGRM CVRs outstanding. For every penny the final VWAP dropped below $2.90, the value of the hedge fund`s CVRs increased by $185,000.

If the maximum payout of $.88 per CVR were achieved, FINRA said, the hedge fund would receive approximately $16 million. Brokaw and his family owned 217,000 of the CVRs, with a potential maximum payout of $188,000.

Included in the evidence against Brokaw were tape recordings of his phone calls to his firm`s trading desk to place sell orders. In one phone call, Brokaw told a Deutsche Bank sales trader, “Take 50,000 MGRM at the market. Sell it down. Sell it as low as you want. Sell it hard, 50,000.”

FINRA also found that Brokaw violated a Deutsche Bank`s policy by only completing one “booking ticket” each day, each showing a single 100,000-share order to sell, each with a false notation that the order was given by the client directly to the trading desk rather than to Brokaw – thus circumventing automatic branch office compliance review of the orders.

Deutsche Bank first suspended, then terminated Brokaw based on his MGRM sales orders for the hedge fund.

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New York (HedgeCo.net) – London hedge fund SRM Global’s case against Countrywide Financial Corp, the mortgage lender acquired by Bank of America, was dismissed yesterday according to a Reuters article.

The hedge fund alleged that Countrywide was “flying blind” and had made misrepresentations and omissions, delaying disclosure of its problems in the U.S. housing market fall, Reuters said. The hedge fund said it lost nearly 90% of its value in 50 million shares of Countrywide common stock in 2008.

Manhattan federal court Judge Richard Berman said, “The hedge fund failed to plead facts showing a primary violation of the securities laws,” dismissing the lawsuit, which also identified Countrywide, Bank of America and former BOFA Chief Executive Officer Ken Lewis, former Countrywide Chief Executive Officer Angelo Mozilo, company President David Sambol and Executive Managing Director Eric Sieracki as defendants, the news source reported.

The three former Countrywide executives are also defendants in an SEC civil fraud lawsuit, Reuters said.

The three former Countrywide executives are also defendants in an SEC civil fraud lawsuit, Reuters said.

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HedgeCo News – The Countdown to Summer 2010 is on and The Fresh Air Fund is in need of host families.

The Fresh Air Fund is an independent, not-for-profit agency, which has so far provided free summer vacations to more than 1.7 million New York City children from low-income communities since 1877. Nearly 10,000 New York City children enjoy free Fresh Air Fund programs annually. In 2008, close to 5,000 children visited volunteer host families in suburbs and small town communities across 13 states from Virginia to Maine and Canada. 3,000 children also attended five Fresh Air camps on a 2,300-acre site in Fishkill, New York. The Fund’s year-round camping program serves an additional 2,000 young people each year.

“We also just received a tremendous offer by a very generous donor.”Sara Wilson od www.freshair.org said, “Any gift given from now until the end of June will be matched dollar-for-dollar.”

In 2009, The Fresh Air Fund’s Volunteer Host Family program, called Friendly Town, gave close to 5,000 New York City boys and girls, ages six to 18, free summer experiences in the country and the suburbs. Volunteer host families shared their friendship and homes FOR up to two weeks or more in 13 Northeastern states from Virginia to Maine and Canada.

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Hedgeco News – London-based hedge fund manager, Silverstone Capital’s flagship hedge fund delivered a gross return of +4.92% for the month of may taking YTD gross performance to +5.31%, whilst the Monza Fund posted a gross return of +6.77% in May. Monza has year-to-date delivered a positive gross return of +10.65%.

Silverstone runs equity long/short hedge funds that specialize in investments in the global automotive industry and related fields.

“We are pleased with the May result but we continue to look forwards.” Saul Rubin, Founding Partner at Silverstone said, “Our intention continues to be to deliver good returns over the long run irrespective of the overall market conditions.”

Silverstone was founded in May 2004, and today manages investments in equity and equity linked products. The firm currently manages the Silverstone Fund and the Monza Fund. The flagship Silverstone Fund opened to outside investors in July 2004. Silverstone has throughout Q2 of 2010 continued to see strong international investor demand for its funds products, and the strong May numbers further reaffirms the unique advantages of the investment philosophy in the Silverstone Fund and the Monza Fund.

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HedgeCo News – The House of Representatives recently passed legislation pushing back the effective date of a proposed tax increase on hedge fund managers which would prevent a portion of their income realized from carried interests in investment partnerships from being characterized as capital gain.

This provision would increase the effective tax rate for fund managers with respect to the portion of their compensation they receive as a “carried interest”. An earlier version of the bill had a Jan. 1, 2010 effective date which has now been moved to Jan. 1, 2011.

“As one of the revenue offsets for these extensions, the bill would generally prevent a portion of any income with respect to carried interests in investment partnerships held by service providers to such partnerships (“investment service partnership interests”) from being characterized as capital gains.” Federal income taxation specialist at RK&O Kenneth E. Werner, said, “Instead, such portion (50% for tax years beginning before January 1, 2013 and 75% thereafter) would be treated as ordinary income.”

The term ‘investment services partnership interest’ means any interest in a partnership which is held by any person if it was reasonably expected that such person (or any person related to such person) would provide a substantial quantity of any services in the nature of advising as to investing in, purchasing, or selling any specified asset, managing, acquiring, or disposing of any specified asset, arranging financing with respect to acquiring specified assets, or any activities in support of the foregoing.

The term “specified asset” means securities, real estate held for rental or investment, partnership interests, commodities, or options or derivative contracts with respect to any of the foregoing.

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The Hennessee Hedge Fund Index declined -2.99% in May (+1.57% YTD), while the S&P 500 decreased -8.20% (-2.30% YTD), the Dow Jones Industrial Average declined -7.92% (-2.79%), and the NASDAQ Composite Index fell -8.29% (-0.53% YTD). Bonds advanced, as the Barclays Aggregate Bond Index increased +0.84% (+3.74% YTD), due to increases in U.S. Treasuries as both Investment Grade and High Yield bonds declined.

“May was the worst month of the year for hedge funds and the worst monthly drawdown since October 2008. However, hedge fund managers avoided significant losses and outperformed traditional benchmarks on a relative basis due to conservative exposures, hedging and short positions,” commented Charles Gradante , Co-Founder of Hennessee Group . “In May, we saw investors significantly de-risk portfolios as volatility increased. Given the negative headwinds that exist and potential global crises, hedge funds continue to operate with low gross exposure levels as they navigate an increasingly challenging investment environment.”

“Hedge funds’ defensive positioning prior to May helped limit losses and provided downside protection,” said Lee Hennessee, Managing Principal of Hennessee Group . “Downside protection is the primary benefit of the hedge fund asset class. In the current environment, where investors seem to be very skittish due to higher volatility and dramatic drawdowns, downside protection and hedges are extremely beneficial. We are seeing hedge funds garner continued interest by the investment community desiring lower drawdowns.”

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HedgeCo News – The Los Angeles Times reports that hedge funds and banks are taking over some of the major US newspapers as they begin to emerge from bankruptcy protection.

“Distressed debt” hedge funds such as Angelo, Gordon & Co. and Alden Global Capital and Oaktree Capital Management have been buying up cheap, delinquent debt, then taking it to Bankruptcy Court for a settlement that transforms the debt into a large share of company stock, the LA Times reported, with itself, Tribune Co., being one of the newspapers under siege along with KTLA-TV Channel 5 among others.

The hedge funds, such as Angelo, Gordon & Co, as well as JPMorgan will be major shareholders in both Tribune and Freedom The LA Times reported. People with knowledge of the the hedge funds’ strategy, say that the hedge funds want quality, branded journalism that still draws advertisers and therefore is worth preserving.

“The hedge funds will have to remain patient if they want to reap what they’ve sown in newspapers,” the LA Times quoted. “The funds probably don’t even have a firm exit strategy in place, and it will take sure signs of an economic recovery to grease deals and liquidity events.”

Analysts believe, the LA Times said, that the newspaper industry had gotten so beaten down during the crisis that they have become a bargain for hedge funds.

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HedgeCo News – Opalesque has released the 32nd issue in a series of regional roundtable forums – the 2010 Opalesque West Coast Roundtable. The 25 page Roundtable publication covers “Armageddon” strategies and how plan sponsors have changed their game during the past 18 months.

“All we did was provide huge amounts of liquidity.” John Burbank from Passport Capital said regarding the massive deficits run up in an effort to stabilize the markets and economies, “The markets are as vulnerable to financial shocks and at least as highly leveraged than they were before the financial crisis. The Fed has more than doubled its balance sheet and will have to exit markets at some point or its legitimacy will be called into question”.

Burbank added that a number of people have asked Passport to design funds comprised of macro trades that would help them hedge against systemic risks.

Jay Gould from Pillsbury also helped creating distaster insurance or “armageddon strategy” funds which work under the premise that U.S. will experience a very difficult time over the next several years, “including hyper-inflation, the abandonment of the U.S. dollar as the world’s reserve currency, further complications associated with our huge deficit spending, and a rush toward hard assets.”

The Roundtable discussion also includes:

• Overview of the latest products and research from funds and CTAs on intermarket correlations and quantitative trading
• A discussion on the impact the regulatory changes will have on the markets: How will mandating more OTC products to clear/trade on an exchange impact liquidity? What is more important in a derivatives contract – liquidity or flexibility?
• The democratization of alternatives: More funds using the 1940 Act format will be offering real CTA strategies with daily liquidity
• Running a hedge fund from the West Coast: Why this location counts and where West beats the East Coast.

The Roundtable was sponsored by the CME Group and the Opalesque 2010 Roundtable Series Sponsors Custom House Group and Taussig Capital. The following West Coast based experts participated:

• John Burbank, Managing Member and Chief Investment Officer, Passport Capital
• Jay Gould, Partner, Pillsbury
• Jeremy Evnine, President, Evnine & Associates, Inc.
• Matt Osborne, Executive Vice President & CIO, Altegris
• Ranjit Sufi, Manging Director, Nuveen
• Rishi Narang, Founding Principal, Telesis Capital
• Tina Lemieux, Managing Director of Hedge Fund and Broker Services, CME Group
• Tom Shanks, Founder and CEO, Hawksbill

Matthias Knab, founder of Opalesque and internationally recognized expert on hedge funds and alternatives, moderates the Opalesque Roundtables.

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