The world's largest banks have seen litigation and regulatory costs soar since the financial crisis. There is reason to believe that increased regulatory oversight may see a similar burden fall on hedge funds.
In January 2014 a Stephenson Harwood survey looking at banking litigation (Hunting Titans: An Insight special on banking litigation) revealed: 59% of counsel at banks said they were involved in more litigation from 2008 to 2012 than in the previous five years; 84% had increased their litigation funding since 2008; 77% said they had budgeted for a similar level of spend over the next 12 months; and
76% said that the regulatory climate has become more combative in the past three years.
The survey also found that 13% of banks were experiencing an upturn in litigation brought by hedge funds.
Claims brought by hedge funds, including Harbinger Capital Partners’ litigation in respect of Northern Rock, and Highland Capital’s claim against Royal Bank of Scotland, alleging fraud in the course of a CDO transaction, have been some of the most widely-reported cases arising out of the financial crisis and it shows no signs of abating. In the past month Connecticut-based AIS Capital Management filed suit in the US, alleging that Barclays, HSBC, Société Générale, Deutsche Bank and Bank of Nova Scotia manipulated the price of gold.
Since 2008 hedge funds have not only pursued litigation against banks, but against corporates too. In various jurisdictions hedge funds, including Elliott Associates, and Greenlight Capital, continue to pursue damages against Porsche SE, in relation to alleged market manipulation, associated with Porsche’s attempted takeover of Volkswagen.
In the aftermath of the financial crisis hedge funds have been very much at the forefront of hunting Titans.
Aside from the increasing frequency with which hedge funds have become involved in high-value litigation, there is evidence to suggest that a number of the other findings of our survey are also capable of application to hedge funds.
In particular, the regulatory burden on alternative investment funds is set to increase markedly in 2014, on both sides of the Atlantic, with costs associated with compliance also increasing in tandem. Just as 76% of general counsel in the survey noted that the regulatory climate had become “more combative” for banks, counsel at hedge funds would likely express the same view.
IN THE SPOTLIGHT
With the emergence of increased regulatory obligations, and global investigations, such as those into allegations of Libor and commodity benchmark manipulation, broadening in scope as well as deepening, it appears likely that hedge funds will follow banks in falling increasingly under the regulatory/enforcement spotlight. For example, in recent weeks it emerged that chief dealers at a number of the largest banks in the global foreign-exchange market raised concerns about hedge funds moving currency rates, through large transactions, in July 2006.
Just as the upturn in regulatory investigations has led to related claims being brought against banks, the growing regulatory focus on hedge funds may, in time, see hedge funds being named as defendants to civil actions, in the manner banks have been in the recent past.
Although the years 2008 to 2013 saw hedge funds Hunting Titans, increased regulatory oversight of the industry may lead to a reversal of that trend.
Alan Ward is an Associate in the Regulatory Litigation team at Stephenson Harwood LLP
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