June 26, 2006

The SEC’s Bad Day: Part I

Unfortunately, I couldn’t get that American Idol song out of my head on Friday – you know, the one that is now omnipresent on the radio: “so you had a bad day…” (not that I ever would admit to watching American Idol). Anyways, some SEC Staffers were probably humming that tune Friday after the US Court of Appeals for the District of Columbia Circuit vacated the SEC’s controversial rule – in Goldstein v. SEC – that had required most hedge fund advisers to register with the SEC. We have posted a copy of the court opinion under “Latest Developments” of our home page.

Based on this ambiguous statement from SEC Chairman Cox, it looks like the SEC will take some time to mull over its choices about how to best regulate hedge funds going forward: either appeal to the full Court of Appeals or the US Supreme Court; come back with a new proposal to regulate hedge funds that would satisfy the Court’s concerns (or lobby Congress to amend the Advisers Act); or do nothing.

Interesting, the Court’s decision hinged on fairly technical grounds, as it found that the SEC rules – which just became effective in February – treated investors in hedge funds as “clients” of the advisor, instead of treating each hedge fund as a single “client” for purposes of the statutory exemption from registration for advisors which advise fewer than 15 clients and meet certain other conditions. The last sentence of the decision is telling for the SEC: “This is an arbitrary rule.”

The SEC’s rulemaking process has been taking it on the chin lately, with the SEC recently submitting a status report to the same court regarding its mutual funds/director independence rules after the court forced the SEC to partially re-do that rulemaking. And other challenges impacting the SEC are looming, such as the challenge to the constitutionality of the PCAOB.

The SEC’s Bad Day: Part II

On Friday, the SEC also had to stare down this NY Times article, which alleges that a SEC lawyer involved in an investigation of insider trading allegations at a prominent hedge fund was fired because he wanted to subpoena a bigwig at one of Wall Street’s firms. This article was at the top of the NY Time’s front page – page A1 – even though the SEC’s inspector general said in an April report to Congress that his office had reviewed the SEC lawyer’s claims and “failed to substantiate the allegations”! See this Washington Post article for that seemingly important IG tidbit.

So until we know the full story here, I will take the NY Times article with more than a grain of salt. Let me explain: it is very hard to get fired from the government. That’s why people go work for the government; it has great job security. Once you are past the one-year probationary period, you have to get caught doing drugs at your desk or having inappropriate relations in the stairwell to get fired (other than high level Staffers who work much more “at will”).

In fact, in my combined 5+ years at the SEC, I can only think of two Staffers who were fired – and both of them were fired right before the end of their probationary period – same as the guy who served as the basis for the NY Times article. So that is traditionally how the SEC’s probationary period works: someone who performs poorly or who doesn’t fit in is shown the door right before they essentially become eligible to be a “lifer.”

Now, this guy’s beef really might be legitimate – and it’s clearly odd that he got a merit pay increase before he was let go – but my gut told me there might be other circumstances at play when I got to the end of the NY Times’ lengthy article, which states:

“Before joining the S.E.C., Mr. Aguirre had a reputation as an innovative plaintiffs’ lawyer in Southern California, representing victims of shoddy home construction. A 1992 article in California Lawyer magazine said he used “aggressive — some say temperamental” courtroom tactics to win several big cases.”

Of course, that blurb sounds like the SEC should have known that it hired itself some trouble, as “aggresive” tactics don’t mix well within the mold of a government agency. Then again, the SEC might have known that – as it looks like it dragged its feet hiring this guy, as the end of the article notes:

“Mr. Aguirre had been at odds from time to time with the S.E.C. When there was a delay in his hiring, he suspected that his age — he was then in his 60’s — was the reason and he filed an administrative complaint with the Equal Employment Opportunity Commission.”

Cross-Border Acquisitions: A Buyer’s Perspective

The second installment of’s M&A Boot Camp for this summer is now available: “Cross-Border Acquisitions: A Buyer’s Perspective.” Join Elizabeth (“Libby”) Kitslaar and Phil Stamatakos of Jones Day as they walk us through the special issues that you will face in a cross-border deal.

If you are not a member, try a no-risk trial as we just launched our half-price “Rest of 2006” rate – believe it or not, a license for a single user is only $100 and there are similar reduced rates for offices with more than one user!