On April 15, the Securities and Exchange Commission charged a private investment firm and one of its affiliated entities for participating in a widespread kickback scheme to obtain investments from New York’s largest pension fund.

The SEC complaint alleges that Quadrangle Group LLC and Quadrangle GP Investors II, L.P. secured a $100 million investment from the New York State Common Retirement Fund. The investment came only after a then-executive at Quadrangle arranged for an affiliate to distribute the DVD of a low-budget film that former New York State Deputy Comptroller David Loglisci and his brothers had produced.

The SEC further alleges that the Quadrangle executive also agreed to pay more than $1 million in purported “finder” fees to Henry Morris, the top political advisor and chief fundraiser for former New York State Comptroller Alan Hevesi. The SEC previously charged Morris and Loglisci for orchestrating the fraudulent scheme that extracted kickbacks from investment management firms seeking to manage the assets of the Retirement Fund.

Quadrangle agreed to settle the SEC’s charges and pay a $5 million penalty.

More details about the allegations are provided below.

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Earlier today the SEC charged Goldman Sachs and one of its vice presidents with defrauding investors by misstating and omitting key facts about a CDO product that it structured and marketed that hinged on the performance of subprime residential mortgage-backed securities (“RMBS”).  Specifically, the complaint alleges that Goldman failed to disclose the role that a major hedge fund, Paulson & Co., played in the portfolio selection process as well as the fact that the hedge fund had taken a short position against the CDO.

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Today the SEC issued for public comment proposed rules that, if adopted, would fundamentally revise the regulatory regime for asset-backed securities (“ABS”).  The proposal is intended to address the central role that the securitization market played in the recent financial crisis.  Comments to the proposal are due within 90 days of its publication in the Federal Register.

According to the press release, the proposed rules have three fundamental goals: (1) to improve disclosure for investors in the public ABS market; (2) to better align the interests of ABS issuers and investors; and (3) to improve disclosure for investors in the private ABS market.  The SEC proposes to address these three goals in a number of specific ways, which are discussed in more detail below.

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On March 2, 2010, the Committee of European Securities Regulators (“CESR”) published a model for a uniform short selling disclosure regime in Europe.  The model would require net short positions held in the shares of European Economic Area (“EEA”) issuers (and other issuers that are solely or primarily admitted to trading on an EEA-regulated exchange or multi-lateral trading facility) to be disclosed to the relevant regulator once the positions reached 0.2% of a company’s issued share capital.  Disclosure to the market would be required if the position reached 0.5% of a company’s share capital.  Additional private and public disclosures would be required if the position subsequently increased or decreased in increments of 0.1% or if the position fell below the relevant trigger thresholds.  All disclosures under the model would be required to be made on the trading day following the day on which the relevant position was established.

Notably, the calculation of net short positions under the model would include not only net short positions (gross short minus gross long) in issued share capital, but also any synthetic financial instruments that create economic exposure to such share capital (e.g., exchange-traded or OTC-linked derivatives contracts, indices, baskets and exchange traded funds).

On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act (the “HIRE Act”).  The purpose of the HIRE Act is to stimulate hiring of U.S. workers by providing, among other things, payroll tax forgiveness and business credits for companies that hire new employees.

To partially offset the cost of these job stimulus incentives (projected at $17.6 billion), the HIRE Act includes several revenue offset provisions designed to strike back against perceived tax avoidance by U.S. persons.  These provisions (estimated to raise $8.7 billion over 10 years) create a broad new reporting and tax regime for foreign financial institutions, including offshore hedge funds, private equity funds and other foreign pooled investment vehicles with U.S. investors, as well as investors in such entities.

As such, managers of offshore funds with U.S. investors and those who invest in such funds will need to focus on the HIRE Act and should be alert for Treasury guidance which is expected to be forthcoming as these rules get implemented.

In summary, the HIRE Act does the following:

(i) imposes a new 30% withholding tax and information reporting regime on most, if not all, types of foreign investment entities (including offshore hedge funds, private equity funds and other investment vehicles);

(ii) imposes new reporting requirements (and increased penalties for failures to comply) on individuals who hold interests in certain foreign entities (including hedge funds); and

(iii) imposes new reporting requirements on shareholders of passive foreign investment companies (“PFIC”).

The HIRE Act also imposes a withholding tax on synthetic “dividend equivalent” payments under certain derivative contracts and modifies the rules available to issuers and holders of bearer bonds with provisions that adversely affect the tax treatment of interest paid on such bearer bonds.