As expected, hedge funds remained a predominant focus for the SEC's Enforcement program in 2010. The various insider trading actions arising out of the Galleon Management, LP scandal and the focus on expert networks captured most of the year's headlines. Private fund managers, however, should not let the spotlight on insider trading distract them from the SEC's other enforcement priorities. As the cases summarized below demonstrate, the SEC's Division of Enforcement, which includes its fully operational Asset Management Unit, continues to bring cases involving asset valuation and disclosures, PIPE (Private Investment in Public Equities) offerings, cross-trading, and related party transactions, among other areas. With the looming effective date of the registration requirements contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act, 2011 promises to be another year in which private funds will attract substantial attention from the SEC's examinations and enforcement staffs.
Specialized Enforcement Units
At the beginning of 2010, the SEC's Division of Enforcement announced the creation of five specialized units designed to focus on complex subject areas of particular interest to the SEC. One of those specialized units, Asset Management, is dedicated to enforcement matters relating to registered and unregistered investment advisers, including advisers to private funds. The division also created a new Office of Market Intelligence, led by Thomas A. Sporkin, that is responsible for "the collection, analysis, risk-weighing, triage, referral, and monitoring of the extraordinary number of tips, complaints, and referrals the SEC receives each year."
The Asset Management Unit is led by Co-Chiefs Bruce Karpati and Robert B. Kaplan, two associate directors within the Division of Enforcement, and has been fully staffed since the spring of 2010. It consists of approximately a dozen assistant directors in the SEC's home office in Washington, D.C. and nine other regional offices, and individual staff attorneys in each of those locations. The members of the unit reportedly hold regular meetings to share market intelligence, develop investigative leads, and discuss particular theories of liability.
Although the jury is still out on the effectiveness of this new structure, the theory behind the new units-that Division of Enforcement attorneys dedicated to particular areas will be more effective in combating violations of the federal securities laws-is a sound one. As the attorneys in these units become more familiar with the private fund industry, advisers who find themselves subject to SEC scrutiny should expect investigations to proceed more expediently and with greater focus.
Insider trading remained a prominent feature of the SEC's enforcement program in 2010, and hedge funds played a starring role. The cases discussed below include the well-known Galleon matter, actions involving expert networks, and a case that demonstrates the importance of establishing procedures reasonably designed to prevent trading on material, nonpublic information.
Galleon and the Focus on Expert Networks
The SEC's most visible actions involving private funds in 2010 involved Galleon Management LP (Galleon) and its progeny. In January 2010, the SEC filed a Second Amended Complaint in the case, SEC v. Galleon Management, LP, et al., 09-CV-8811 (S.D.N.Y.) (JSR). The Complaint contained newly alleged claims of insider trading by two of the Galleon hedge fund defendants, Raj Rajaratnam (Rajaratnam) and Anil Kumar (Kumar), and brought the total amount of insider trading profits (or losses avoided) in the Galleon matter above $52 million.
. Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law July 21, 2010 (Pub. L. 111-203, H.R. 4173) (111th Cong. 2010).
. Press Release, Securities and Exchanges Commission, SEC Names New Specialized Unit Chiefs and Head of New Office of Market Intelligence (Jan. 13, 2010).
. See Robert Khuzami, Director, SEC Enforcement Division, "Remarks at News Conference Announcing Enforcement Cooperation Initiative and New Senior Leaders," Jan. 13, 2010.
. See SEC v. Galleon Mgmt., LP, et al., Civil Action No. 09-CV-8811 (S.D.N.Y) (JSR), Litig. Release No. 21397, 2010 WL 332016 (Jan. 29, 2010).