Private Funds Weekly Roundup Real Time Legal, Regulatory & Tax Developments Impacting Hedge Funds, Private Equity & Investments February 4, 2008 │ v.4, No. 4 PIPE INVESTORS – SEC LOSES ANOTHER COURT BATTLE OVER PIPE TRADES: The U.S. District Court for Eastern Pennsylvania dealt another blow to the SEC’s quest to hold hedge fund managers liable for registration violations related to the use of PIPE securities to cover short sale positions. In keeping with similar recent cases, http://www.gtlaw.com/pub/alerts/2008/0114.pdf, the Court threw out SEC charges that the defendant, a fund manager, was violating registration requirements when he covered short sale positions with securities from a PIPE issuance after the PIPE securities had been registered for resale. The SEC’s other charges of insider trading and making materially misrepresentations to certain PIPE issuers were not dismissed by the court. A copy of the SEC’s complaint is available on the SEC website: http://www.sec.gov/ litigation/complaints/2007/comp20278.pdf ACTIVIST AND RISK ARBITRAGE INVESTORS – HSR FEES AT REVISED THRESHOLD LEVELS: Following up on our report of January 22, http://www.gtlaw.com/pub/alerts/2008/0122.pdf, please find the revised thresholds with the corresponding filing fee for filings relating to M&A transactions under the HartScott-Rodino Act here: http://www.gtlaw.com/pub/alerts/2008/0200a.pdf. This update was written by our antitrust colleagues Shirley Johnson and Cecil Chung. The new rules will go into effect for all deals closing on or after February 28. TAX – INTERNAL REVENUE SERVICE CHALLENGES TAXPAYER-FAVORABLE RULING ON TAX WORK PAPERS: In August 2007, the IRS suffered a serious setback in its efforts to challenge LILO (lease inlease out) transactions undertaken by a Rhode Island corporation. In the August Rhode Island District Court decision, the court held that work papers prepared by the corporation's internal tax department were protected by "work product doctrine." This doctrine keeps documents prepared to help fend off a government challenge of a tax position out of the hands of the government. The IRS position is that it won't request work papers unless they relate to a so-called "listed transaction," that is, one that the IRS has identified as having a significant potential for tax avoidance. Even with the limited scope of the IRS's request, the Rhode Island court would not compel disclosure of the work papers on the ground that they did not contain any factual information and that it is up to the IRS to develop its own theories as to why the tax benefits are not available – the IRS should not be able to use the taxpayer's own internal technical deliberations to attack the taxpayer's positions. The facts in this case are muddied because the work papers at issue were used for securities law purposes as well as tax purposes and the corporation turned over those work papers to its auditors. The issue in this case has a huge resonance for the private fund industry as the IRS steps up its audits of private funds. We recommend developing a document retention policy, adhering to it and making clear as to why documents and communications (including email) are generated and not waiting for the IRS to assert that one or more internal musings as to tax risks means that a transaction should be challenged. SECURITIES LAWS – ATTORNEY SAYS SEC MAY RETAIN ABILITY TO USE SCHEME LIABILITY: Notwithstanding the SEC’s poor track history in federal courts and the recent Supreme Court Stoneridge decision rejecting “scheme liability” in private causes of action, an attorney for the SEC has recently stated (speaking only on his own behalf) that the SEC may still have authority to charge secondary actors, who did not personally make statements or sign the public filings that were allegedly fraudulent, as aiders and abettors under the legal theory of scheme liability. In the Stoneridge decision, http://www.supremecourtus.gov/ opinions/07pdf/06-43.pdf, the Supreme Court rejected scheme liability in private securities fraud actions. Although the Supreme Court mentioned that claims against secondary actors can be pursued only by the SEC and not by the private parties, the Supreme Court did not directly address the SEC's use of scheme liability. The SEC sometimes brings enforcement actions charging defendants as primary violators or as aiders and abettors, which claims have different standards (e.g., scienter standard). It remains to be seen how such claims would be decided given the Stoneridge decision, as was admitted by the SEC attorney. RISK ARBITRAGE/ACTIVIST INVESTORS – RECENT PROXY PROPOSALS: • DIRECTOR SHARE OWNERSHIP: On January 3, the SEC notified ExxonMobil Corp. that it may not omit a proxy proposal requiring minimum levels of share ownership for board nominees. Specifically, the proposal would require board nominees to own (and have owned for three years) $3 million of the company’s shares or to be a representative of a pension fund, retirement fund or other entity “holding at least five million voting shares” in the company. Exxon’s attorneys argued that the company did not have the power to implement the proposal, and that the proposal had no mechanism to cure potential violations of the ownership standard by board members. The SEC refused to grant no-action relief. CEO SUCCESSION PLANNING: In a January 2 letter, the SEC advised Toll Brothers Inc. that it may omit a proxy proposal that called for the board to implement and make public a succession planning policy for the office of CEO. The proposal called for, among other things, developing formal criteria to evaluate potential candidates and instituting an annual review and report of the succession plan. Toll Brothers argued that such a plan could be excluded from the proxy because it related to the ordinary business operations of the company. The SEC concurred that personnel decisions of this nature comprise ordinary business, and permitted Toll Brothers to omit the proposal. • DISTRESSED AND SPECIAL SITUATION INVESTORS – DISTRESSED OPPORTUNITIES: We have attached the latest Distressed Assets Opportunities list prepared by our colleagues in the Business Reorganization and Bankruptcy Group. The list can be accessed by clicking the following link: http://www4.gtlaw.com/marketing/re/3803v20/ For comments or further information, please contact one of the following Greenberg Traurig attorneys: Sylvie Durham | 212.801.6923 | firstname.lastname@example.org 200 Park Avenue | New York, NY | 10166 Biography Cecil S. Chung | 202.331.3157 | email@example.com 2101 L Street, N.W. | Suite 1000 | Washington, D.C. | 20037 Biography Dmitry G. Ivanov | 212.801.2210 | firstname.lastname@example.org 200 Park Avenue | New York, NY | 10166 Biography Shirley Z. Johnson | 202.331.3160 | email@example.com 2101 L Street, N.W. | Suite 1000 | Washington, D.C. | 20037 Biography Mark H. Leeds | 212.801.6947 | firstname.lastname@example.org 200 Park Avenue | New York, NY | 10166 Biography Editor: James Burke Contributing Writer: Dmitry Ivanov Research Assistant: Eytan Moked Publisher: Kathleen Lynch www.gtlaw.com ALBANY AMSTERDAM ATLANTA BOCA RATON BOSTON CHICAGO DALLAS DELAWARE DENVER FORT LAUDERDALE HOUSTON LAS VEGAS LOS ANGELES MIAMI NEW JERSEY NEW YORK ORANGE COUNTY ORLANDO PHILADELPHIA PHOENIX SACRAMENTO SHANGHAI SILICON VALLEY TALLAHASSEE TAMPA TYSONS CORNER WASHINGTON, D.C. WEST PALM BEACH ZURICH © 2008 Greenberg Traurig, LLP. Attorneys at Law. All rights reserved. Greenberg Traurig is a trademark and trade name of Greenberg Traurig, LLP and Greenberg Traurig, P.A. 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