Irving H. Picard v. Saul B. Katz et al

Filing 168

DECLARATION of Regina Griffin Continued With Exhibits 16 to 30 in Support re: 162 FIFTH MOTION in Limine To Deem Statements By Sterling Stamos Employees In The Course Of And In Connection With Their Employment By Sterling Stamos As Admissions of The Sterling Defendants.. Document filed by Irving H. Picard. (Attachments: # 1 Exhibit 16, # 2 Exhibit 17, # 3 Exhibit 18, # 4 Exhibit 19, # 5 Exhibit 20, # 6 Exhibit 21, # 7 Exhibit 22, # 8 Exhibit 23, # 9 Exhibit 24, # 10 Exhibit 25, # 11 Exhibit 26 - 1, # 12 Exhibit 26 - 2, # 13 Exhibit 27, # 14 Exhibit 28, # 15 Exhibit 29, # 16 Exhibit 30)(Sheehan, David)

Exhibit 23

From: Peter Stainos [pstamosSterlingStamos.com]
Seri!: Monday, November 15, 2004 8:19 AM
To: J. Ezra Merkin
Subject: RE: SRZ Client Alert: SEC ADOPTS RULE REQUIRING HEDGE FUND MANAGER REGISTRATION;
COMPLIANCE DATE SET FOR FEBRUARY I, 2006

1mportaice: High
Dear Ezra,

Thank you. Sorry to have hit you with so many 'urgent' messages on Friday. We had a tough conversation with our
attorneys on Thursday evening that will have several implications for our investments with our friend in the Lipstick building.
Hence, the calls.
I wilt call you later today to tilt you in on some of the details, but we may have to significantly decrease or increase our
exposure to options arbitrage (i.e., Ascot and Ariel). I need your counsel.
I hope and trust that you and your family are well, Ezra. I very much look forward to seeing you on Wednesday. lt has been
fartoo long.
As always,

Peter

Peter S. Stamos
Chairman

pstamossterlingstarnos.com
h Itp :/Iwww.s te rU n gota in os .com

575 Fifth Avenue
New York, NY 10017

SterlingStani s Logo

1212 4854370
F 212 485 4371

2400 sand Hill Road
Menlo Park, CA g4o25
T 650 233 0263
F 650 233 0202

This message is intended only for the use of the Addressee and may contain information thatis PRIVILEGED and CONFIDENTIAL. If you are not the
intended recipient, please telephone or email the sender and delete this message and any attachment from your system. II you are not the intended
recipient, you must not copy this message or attachment or disclose the contents to any other person.

Original Message
From: 3. Ezra Merkin [mailto:JEMerkin©gabrielcapital.com}
Sent: Sunday, November 14, 2004 9:48 PM
To: Peter Stamos
Subject SRZ Client Alert: SEC ADOPTS RULE REQUIRING HEDGE FUND MANAGER REGISTRATION; COMPLIANCE
DATE SEI FOR FEBRUARY 1, 2006
Peter,

Please make sure you have read this (it is not very long or difficult) by the time we see each other Wednesday evening.

Just as backround,l have sent this tO and been over this with our friend in the lipstick building. Please treat that
completely confidentially.
I look forward to seeing you Wednesday. I have a long list, even by our customary standards.

EXHlBIT.-0
CONFIDENTIAL

I-j

SSMT0001 4472

-iD 777

SSMSAAOO1 4472

Original Message
From: Koupal, Shawn [mailto:[e-mail]
Sent: Wednesday, October 27, 2004 6:29 PM
To: User, wwwmail

Subject: SRZ Client Alert: SEC ADOPTS RULE REQUIRING HEDGE FUND MANAGER REGISTRATION; COMPLIANCE
DATE SET FOR FEBRUARY 1, 2006

SCHULtE ROTH & ZABETJ TU'
919 Third Avenue, New York, NY 10022
Te!: [phone] + Fax: [phone]
http://www.srz. CO
E-mail: wwwmail('ED,srz.com
New York & London

ALERT
SEC ADOPTS RULE REQUIRiNG IIEDGE FUND MANAGER REGISTRATION;
COMPLIANCE DATE SET FOR FEBRUARY 1,2006
The SEC voted yesterday to adopt Rule 203(b)(3)-2 and amend related rules under the Advisers Act.
These actions will require certain hedge fund managers to register with the SEC by February 1, 2006. In
substance, newly adopted Rule 203(b)(3)-2 requires an investment adviser to any "private fund" to count as a
single client each investor in the fund (and to look through and count as a single client generally each
investor in a fund that invests in the adviser's fund). The effect of this rule is to require advisers to hedge
funds having 15 or more investors to register wïth the SEC. [1 if lJ The rule also contains special provisions
for (i) advisers located outside the U.S. and (ii) advisers to certain funds with two-year lock up provisions,
including private equity and venture capital funds.
The information contained in this Alert is based on the proposed rule and related release and discussion
held during yesterday's SEC meeting, including a statement that the rule is being adopted substantially as
proposed. The text of the new rule and the related release are not expected to be issued for at least two or
three weeks. We will provide additional clarif'ing information at that time.

A. Background
Under Section 203(b)(3) of the Advisers Act, an investment adviser is not required to register with the
SEC if it: (i) has fewer than 15 advisory clients in any 12-month period; (ii) does not hold itself out generally
to the public as an investment adviser; and (iii) does not advise an SEC registered investment company or
business development company. Prior to yesterday's action, Rule 203 (b)(3)-1 permitted an investment
adviser to count a pooled investment vehicle, such as a hedge fund, as a single client (rather than count each
investor as a single client), provided that the fund received investment advice based on its overall investment
objectives rather than the individual investment objectives of the fund's investors. Accordingly, an adviser

CONFIDENTIAL

SSMT00014473

SSMSAAOO1 4473

could manage up to 14 hedge funds without being required to register with the SEC.

B. Rule 203(b)(3)-2: Application of the New "Look-Through" Provision
New Rule 203(b)(3)-2 now requires advisers to 'private funds" to look through each of those funds and
count each investor in the funds as a single client. Accordingly, an adviser to private funds that have in the
aggregate 15 or more investors[1 ][2] during the course of any 12-monili period[lJ[3] must register with the
SEC. For purposes of the new rule, a "private fund" includes a company that:
a

Would be an investment company but for the exclusions from registration of
Sections 3(c)(l) or 3(c)(7) of the Investment Company Act of 1940;
o
Permits owners to redeem their ownership interests in the company within two years
of purchase; and
a
Is offered based on the investment advisory skills, ability or expertise of the
investment adviser.
I. Exclusion for Funds with a Two-Year Lock Up Provision
Because new Rule 203 (b)(3)-2 defines a "private fund" as a fluid that permits its owners to redeem their
interests within two years of their purchase, the rule excludes certain fluids, including private equity and
venture capital funds, from the look-through provision if they maintain a two-year "lock up." The two-year
lock up period will be required only for new investors (or additional investments by existing investors) after
the compliance date, February 1, 2006. The "lock up" must continue for two years, except that redemptions
or withdrawals are permitted in the case of an extraordinary circumstance (e.g. for tax or regulatory
reasons). Advisers to these funds may continue to rely on Rule 203(b)(3)-1 and count each of these funds as
a single client.

Fund-of-Funds Look Throuoh
The new rule contains a special provision for advisers to hedge funds in which a registered investment
company invests. Hedge fund advisers are required to count the investors in the registered fund as its own
clients for purposes of detennining the 14-client registration threshold. According to the SEC, this provision
will preclude the possibility of a hedge fund adviser providing its services to thousands of mutual fund
investors through fourteen or fewer mutual funds, each of which could invest in the private fund, and each of
which would count as a single client.
Non-U.S. Investment Advisers

The new rule applies to non-U.S. advisers on a limited basis. These advisers are not required to count as
clients non-U.S. investors in any offshore funds they advise and generally are not required to count as clients
any non-U.S. investors who, subsequent to investing in a fluid, move to the United States. To determine the
status of an investor as a U.S. client, an adviser will be required to look to the following at the time of
investment: (i) the residence of any natural person; (ii) the location of the trustee for any trust; and (iii) the
place of organization for any corporation or similar business entity. In addition, a non-U.S. adviser is not
required to look through and count as clients any U.S. investors in publicly offered, registered offshore funds
they advise (e.g., investment vehicles such as UCITS).

CONFIDENTIAL

SSMT00014474

SSMSAAOO14474

A non-U.S. adviser that is required to register with the SEC because of the existence of a U.S. investor in
an offshore fund will be subject to the Advisers Act only with respect to its US, investors, as outlined in the
SEC's no-action letter to Un/banco (July 28, 1992) and similar letters issued by the SEC staff subsequent to
Un/banco. Under these letters, a non-U.S. adviser is required to comply with limited provisions of the
Advisers Act (ïneluding, as we understand, making available to the SEC certain of its records relating to U.
S. clients) and is subject to SEC inspections with respect to its treatment of U.S. clients. (A full reading of
the SEC rule and related release will be necessary to determine the full scope of Advisers Act requirements
that will apply to non-U.S. advisers.)

C. Related Amendments to the Advisers Act
The SEC also voted yesterday to adopt amendments to various rules under the Advisers Act to
accommodate hedge fund managers. The compliance date set for these amendments is February 1, 2006.
The Recordkeeping Rule - Use of Past Performance

The SEC has amended Rule 204-2 under the Advisers Act (i.e., the "Recordkeeping Rule) to permit a
newly registered hedge fund adviser to use performance information relating to the period prior to its
registration without being subject to the normal requirement that it maintain records supporting that
performance information. This amendment is intended to help ensure that hedge fund advisers required to
register as a result of Rule 203(b)(3)-2 are not deprived of the ability to use performance information for
periods prior to their registration. (We remind our clients that there are important issues other than
recordkeeping that must be considered before using investment perfoiivance information.)
The SEC also has amended the Recordkeeping Rule to clarify that the books and records of a hedge fund
adviser registered with the SEC include records of the hedge funds for which the adviser or a related person
(as defined in Form ADV) acts as general partner, managing member, or in a similar capacity.
The Performance Fee Rule - Grandfather Provision

The SEC has incorporated a "grandfather" provision into Rule 205-3 under the Advisers Act (i.e., the
"Performance Fee Rule"). This provision allows a registered hedge fund adviser that advises a Section 3(c)
(1) fund to charge incentive fees and allocations to an investor in that fund who is not a "qualified client" if
the investor invested in the fund prior to the adviser's registration. Generally, a "qualified client" is a person
who, at the time of making an investment, has a net worth of more than $1 5 million or has at least $750,000
of assets under the management with the fund's investment adviser (which may include the amount of the
investment and the value of any previous investments).
The Custody Rule - Extension for Delivery of Audited Financial Statements

The SEC amended Rule 206(4)-2 under the Advisers Act (i.e., the "Custody Rule") to provide greater
flexibility to investment advisers to funds of funds. Specifically, the amendment extends the time within
which a registered adviser must deliver to investors the audited financial statements of a fund of funds it
manages from 120 days to 180 days after a fund of funds' fiscal year-end. Prior to the compliance date,
advisers to funds of funds may rely on the SEC staffs earlier no-action position that already provides for the
extension to 180 days.

CONFIDENTIAL

SSMT00014475

SSMSAAOO1 4475

Amendments to Form ADV

The SEC has amended Form ADV to identify advisers to hedge funds. The current Form ADY collects
information about advisers to pooled investment vehicles without distinguishing hedge fund advisers from
other advisers The SEC amended Item 7 B. of Part lA and Section 7 B. of Schedule D to require advisers
to "private funds,' as defined in new Rule 203(b)(3)-2, to identify themselves as hedge fund advisers in Part
IA and Schedule D of Foini ADY.
State Registration Requirements

The adoption of Rule 203(b)(3)-2 and related amendments to the Advisers Act do not directly change
state investment adviser requirements. Accordingly, we remind unregistered advisers, particularly
investment advisers with less than $25 million in assets under management, to check applicable state
registration requirements. Moreover, it is possible that various states might seek to adopt rules similar to
Rule 203(b)(3)-2 under which hedge fund advisers not registered with the SEC would be required to register
in those states.

Compliance Date
As stated above, the SEC has adopted February 1, 2006, as the compliance date. By this date, any hedge
fund adviser required to register with the SEC must have submitted its registration statement on Form ADV
and be fully compliant with all applicable requirements arising out of the Advisers Act.

Suggested Action Steps
Tn order to assist our unregistered clients in becoming registered with the SEC and meet the new
requirements that will be applicable to them, we recommend taking the following steps:

Appoint a Registration Committee. Consider creating a "Registration Committee" consisting of
the firm's general counsel and compliance officer (if a separate person), as well as possibly the firms
chief investment officer, head trader and chief financial officer, and assign persons with responsibility
for (i) gathering infoiination that will be necessary for completing a Form ADY and for compiling
written compliance policies and procedures and (ii) seeing the registration process through to
completion.
Begin Completino the Form ADY. Download a copy of the Form ADV, the investment adviser
registration form, from the SEC's Internet Website, which can be found at www.sec.gov/divisions/
investmentliard!iastuffshtml. Review the form and begin to collect the information necessary for its
completion. Note that the process can take upwards of two or three months. For information on how
to register with the SEC, see www.sec.gov/divisions/investmentliard/register.shtml.
Understand the New Requirements Applicable Under the Advisers Act. A number of Advisers
Act provisions and rules apply specifically to registered investment advisers including rules on (i)
insider trading and codes of ethics (Section 204A and Rule 204A-l); (ii) recordkeeping (Rifle 204-2);
(iii) performance fees (Rule 205-3); (iv) the assignment of advisory contracts (Section 205(a)); (y)
advertising (Rule 206(4)-l); (vi) custody of client assets (Rule 206(4)-2); (vii) payments to solicitors
(Rule 206(4)-3); (viii) special disclosures regarding any financial impairment and disciplinary events

CONFIDENTIAL

SSMT00014476
SSMSAAOOI 4476

(Rule 206(4)-4); (ix) proxy voting (Rule 206(4)-6); and, of course, (x) designating a chief compliance
officer and maintaining written compliance policies and procedures (Rule 206(4)-7). For additional
information about these requirements, see An Overview ofAdvisers Act Requirements, by SRL Partner
TelTance OMalley, availabl.e at www.iinews.com/site/pdfs/JTC Summer 2004 OMalley.pdf.

Desionate a Chief Compliance Officer. Identify and designate a Chief Compliance Officer by the
date of registration and assign the person overall responsibility for administering the fijin s compliance
policies and procedures.
o

Develop Written Compliance Policies and Procedures. Revïew any existing compliance policies
and procedures and develop any additional policies and procedures that may be necessary to comply
with Rule 206(4)-7, which requires a registered investment adviser to adopt policies and procedures
reasonably designed to prevent violations of the Advisers Act and the rules adopted thereunder by the
adviser or any supervised persons. Begin drafting a comprehensive set of written policies and
procedures. Note that this process may take upwards of three to four months.
o

Finally, we remind advisers who will be required to register under the new rule that they may want to
consider any previous decision not to accept BRISA money due to the reqtiirement that a hedge fund
containing more than 25% of its assets from accounts subject to BRISA must be managed only by an SEC
registered adviser.
If you have any questions regarding this Alert, please contact Step hanie Bresiow at [phone]; Larry

Eckert at [phone]; David Eh-on at (2i2) 756-2269; Steve Fredman at (212) 7562567; Kenneth Gerstein at [phone]; Christopher 1-lilditch at [phone]; Kelli
Moli at [phone]; David Nissenbaum at [phone]; Terrance J. O'Maliey at (212)
756-2345; Paul Roth at [phone]; Phyllis Schwartz at [phone]; George Silfen
at [phone]; Daniel Shapiro at [phone]; or Marc Weingarten at [phone]. www .srz.
corn

[1] [1] In order to be eligible to register with the SEC, an adviser must have at least $25 million in assets
under management. Otherwise, an adviser must look to the laws of the statç in which the adviser has its
principal office and place of business to determine whether or not state registration is required.

Advisers to hedge funds are not required to count as clients the hedge fund adviser, executives and
partners of the adviser (and certain of their family members) or certain employees of the adviser.
[1] [2]

[1] [3] The 12-month period will not begin to run until the compliance date.

Schulte Roth & Zabel LLP
919 Third Avenue
New York, NY 10022
(0 212-756-2000
(f) 212-593-5955

* To unsubcribe, please respond to this email with the text unsubscribe included.

This information has been prepared by Schulte Roth & Zabel LLP ("SRZ') for general informational
purposes only. It does not constitute legal advice, and is presented without any representation or

CONFIDENTIAL

SSMT00014477

SSMSAAOO14477

warranty whatsoever as to the accuracy or completeness of the information or whether it reflects the
most current legal developments. Distribution of this information is not intended to create, and its
receipt does not constitute, an attorney-client relationship between SRZ and you or anyone else.
Electronic mail or other communications to SRZ (or any of its attorneys, staff, employees, agents or
representatives) resulting from your receipt of this information cannot be guaranteed to be confidential
and will not, and should not be construed to, create an attorney-client relationship between SRZ and
you or anyone else. No one should, or is entitled to, rely in any manner on any of this information.
Parties seeking advice should consult with legal counsel familiar with their particular circumstances.
Under the rules or regulations of some jurisdictions this material may constitute advertising.

"SMTP2.srz.com' made the following annotations on 10/27/2004 06:39:30 PM.
NOTICE

This e-mail message is intended only for the named recipient(s) above. It may contain confidential
infoiniation that is privileged or that constitutes attorney work product. If you are not the intended recipient,
you are hereby notified that any dissemination, distribution or copying of this e-mail and any attachment(s)
is strictly prohibited. If you have received this e-mail in error, please immediately notify the sender by
replying to this e-mail and delete the message and any attachment(s) from your system. Thank you.

CONFIDENTIAL

SSMT00014478

SSMSAAOO14478