Introducing Hedge Funds and Private Equity Firms to E-Discovery
Posted by Adam I. Cohen at 12:43 PM
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The details of rules regulating “alternative investment” funds like hedge funds and private equity firms are as yet uncertain. But we do know that they will include new requirements to retain and disclose ESI. Proposed legislation such as the “hedge fund transparency act” even emphasizes this fundamental truth in its title. While some of the larger firms saw the writing on the wall in terms of heightened regulatory scrutiny years ago, the alternative investment players who can be counted among those who proactively prepared for a more demanding legal compliance regime are few, and typically limited to the largest and best known firms doing the largest and most highly publicized deals.
As major private equity firms and hedge funds became involved in highly publicized transactions which caught the eyes of plaintiffs’ lawyers, they started to experience the joys of e-discovery. Through these experiences, some of the alternative investment funds started to develop internal compliance measures that will help them in handling the new compliance regime. Other firms believed that by demonstrating that they were “good corporate citizens” they could convince lawmakers that the industry was capable of self-regulation. Then Wall Street collapsed.
Still other firms may be well prepared because their leaders come from large banks and businesses where compliance culture is engrained and well-integrated. However, many hedge funds trace their roots more directly to the world of the trading floor, where a notoriously wilder attitude is sometimes prevalent. This is not to say that those who should have known better acted like they did.
Apart from the exceptions, most firms that were not previously regulated and have been lucky enough to avoid litigation as a regular occurrence will have to take a fresh look at their information systems infrastructure and the mechanisms (or lack thereof) supporting imminent retention and disclosure requirements. For example, with email being a source of information at the top of every regulator’s and plaintiff’s wish list, private equity/hedge funds will need to ensure that they have a way to identify and preserve the potentially relevant emails, as well as a way to search, review and produce them on a tight schedule. Making the investment of resources necessary to establish a defensible, repeatable e-discovery process, along with implementation of necessary technology, may come as an unwelcome shock to businesses used to thinking about profits and losses as opposed to legal and IT costs.
