Hedge fund advisers are beginning to have compliance departments review private investment in public equity (PIPE) transactions from broker/dealers before routing them to the funds’ trading desks, according to AIN sister publication Compliance Reporter. B/Ds sometimes neglect to mention whether the offering is material nonpublic information. “They’re so eager to sell the deal they may leave material nonpublic information on people’s voice mail,” noted the chief compliance officer to a hedge fund adviser in New York.
A CCO to another hedge fund adviser said his firm has established procedures through which the firm’s traders automatically refer calls from PIPEs issuers to the compliance department.
Steven Kessler, CCO at Stamford, Conn.-based SAC Capital Advisers, a group of hedge funds, told a Securities Industry Association alternative investment conference in New York last Wednesday that hedge funds are very aware of the issues raised by receiving material nonpublic information. The Securities and Exchange Commission plans to bring additional enforcement actions against hedge fund advisers involved in PIPEs (CR, 5/5).
In previous enforcement actions, the SEC has charged hedge funds with insider trading on information about upcoming PIPEs. A B/D may call up a hedge fund adviser and say, “issuer XYZ is bringing a PIPE offering, are you in?” Karl Wachter, general counsel to Amaranth, a Greenwich, Conn.-based hedge fund, told the conference. Amaranth directs inquiries on PIPEs to compliance as well.
Determining whether a PIPE is material nonpublic information, however, is an ambiguous issue. The SEC has made the case that a PIPE, prior to its announcement, is in and of itself nonpublic information. But the question is whether the outside investor in a PIPE has an explicit duty of confidentiality to the company in the offering. An argument can be made that if the investor does not have that duty it has no duty to refrain from trading in the stock of the offering, according to some lawyers.