The credit crunch and its continuing repercussions are causing pain to many managers and investors but not, it seems, to litigators. As the investment industry grapples with continuing economic uncertainty and mostly mediocre to poor performance, lawyers are being called in ever more frequently to settle disputes between investors and managers, and between managers and the companies in which they invest.
Expro hearing outcome will indicate hedge fund clout
A court hearing to determine whether a consortium of three private equity firms should be allowed to complete their planned acquisition of oil services company Expro was adjourned on Monday, leaving in the balance a bid by hedge funds and other Expro shareholders for extra time to allow a higher bid to be considered.
Hedge fund Mason Capital and its supporters, thought to include Sandell Asset Management, Trafalgar Asset Managers, Carlson Capital, Baillie Gifford and Fidelity, want the takeover delayed by a fortnight to give shareholders the opportunity to consider a last-minute bid from US giant Halliburton.
The shareholders are seeking the adjournment to give Halliburton the opportunity to re-enter the fray and possibly trigger some kind of auction. The hearing has been delayed from yesterday until Thursday morning in order to give Expro time to formulate its response to the objections raised by Mason Capital and other shareholders.
Candover has teamed up with Goldman Sachs Capital and AlpInvest Partners to bid GBP1.8bn, or GBP 16.15 a share, for Expro through its acquisition vehicle, Umbrellastream. Halliburton reportedly proposed a bid of GBP16.25 last Friday, but withdrew after the Expro board said it would not be in shareholders' interests to accept an offer involving delay in payment and "execution risks".
Under current UK takeover rules, once a bid has been rejected and the bidder has pulled out of the sales process, it is unable to make another offer for the company for the next six months. If the two-week delay were granted, that would presumably demonstrate the level of clout enjoyed by hedge funds in the financial world. Mark Curtis of law firm Simmons & Simmons was quoted as saying: "If the court does grant the two-week delay, it will be an unprecedented challenge to the authority of the Takeover Panel."
Hedge funds must take advantage of skills outflow
The time is right. Hedge fund managers have never had it better in terms of having access to the best available talent to boost their business. In the wake of the job cuts announced by many investment banks and other financial institutions, many skilled executives are looking keenly at joining hedge fund and private equity firms. This could provide a fillip to hedge funds, many of which are performing well despite the difficult market conditions.
Citigroup is reportedly cutting thousands of trading and investment banking jobs this week as part of its plan to reduce the headcount its investment banking division by about 10 per cent. The departure of some senior executives, including Steve Bowman, Citi's head of hedge fund services, adds to the exodus of alternative investment talent.
In total, the US financial sector has announced around 66,000 job cuts in the first five months of this year, according to Chicago-based outplacement firm Challenger, Gray & Christmas. This brings to more than 83,000 the number of announced job losses in the industry since last July, according to data compiled by Bloomberg.
More than 45 traders, bankers, analysts and other executives have left major investment banks this year to join hedge funds and private equity firms, Bloomberg says - not including people who have left to start their own companies.
The pain for the investment banks is providing a fresh supply of talented traders, administrators and strategists to hedge fund managers, which now have the challenge of demonstrating they can use the new blood effectively.
Many hedge fund observers have been watching CSX's annual shareholders' meeting on June 25, which took place amid much wrangling between the US railway operator and its hedge fund shareholders, The Children's Investment Fund Management and 3G Capital Partners.
Last week, the judge at a federal appeals court agreed with CSX that TCI and 3G had dodged certain disclosure requirements in the months prior to a bitter and public proxy fight over the make-up of the company's board. CSX had wanted votes amounting to 6.4 per cent of its stock to be invalidated, because the judge had determined that when the shares were acquired by the funds, they had failed to meet their disclosure obligations.
However, the court ruled that although the disclosures were belated, the delay had not caused irreparable harm to the company's shareholders. Therefore the judge granted only CSX's request that the funds be monitored to prevent future violations of securities laws.
The funds have also received backing from the Securities and Exchange Commission, which ruled that TCI did not violate reporting requirements by failing to disclose beneficial ownership during swap transactions involving CSX shares.
Following the voting on Wednesday, which saw further disputes over the conduct of the ballot, the hedge funds, which between them hold around 8.7 per cent of the company's stock, say that four of the slate of five directors they nominated to CSX's 12-member board have been elected. The company says the results were "too close to call" and that the final results may not be announced until July 25. Does a re-run of Bush v. Gore loom?
The salesman and his toast
"The entire sub-prime market is toast," read an e-mail between Ralph Tannin and Matthew Cioffi, two former Bear Stearns hedge fund managers who stand accused of having known their portfolios were in trouble, but lied to investors about it. The managers were arrested and indicted on conspiracy and securities fraud charges last week following a federal criminal probe into the collapse of two funds they oversaw.
According to the indictment, the fund managers lied about the funds' prospects despite concerns over liquidity and the outlook for the market. In an email on April 22 included in the indictment, Tannin warned Cioffi the sub-prime market could be "toast", while both men were touting their funds as an "awesome opportunity" for investors.
Hedge funds as an industry are set to bear the brunt of the reaction to the evidence coming into the public domain. Expect to see lengthy reports about the lack of transparency offered by hedge funds and how the sub-prime mortgage crisis has caused this loosely regulated industry heavy losses and a slew of redemptions.
Expect additional pressure from regulators and politicians on codes of conduct for hedge funds and more criticism on managers and the way they conduct their operations. Expect fund managers themselves to be very, very careful on what they say or write in the future.
But the problem, in the end, was due to the fact that Tannin and Cioffi appear to have started acting less like hedge fund managers and more like silver-tongued salesmen. And for that they are likely to pay.