Judge Orders Hedge Fund Disclosure In Northwest Case

Judge Allan Gropper of the U.S. Bankruptcy Court in New York ordered hedge funds to disclose the details of their holdings in Northwest Airlines. "Any interest that individual committee members may have in keeping this information confidential is overridden."

Gropper's ruling enforces Bankruptcy Rule 2019, which says parties acting as a group must disclose certain information about their holdings. The decision requires the 13 hedge funds on the committee to make public information about trading patterns, holdings and pricing, which hedge funds, as a rule, prefer to keep secret.

The judge denied a request by the hedge fund committee, led by Owl Creek, who argued that forcing sophisticated investors to disclose trade information may hurt the secondary market for trading claims and equity. Gropper gave the funds until Wednesday to publicly state their stakes in Northwest, along with when and at what price they bought the securities.

Northwest Airlines said that it expected to be worth roughly $7 billion when it emerged from bankruptcy later this year and that it would pay unsecured creditors roughly three-quarters of what they were owed. The unsecured creditors also objected to sealing the documents, arguing that the public had a right to know how the hedge funds came to own about $264.7 million in claims, 30% of the airline's stock.

The hedge fund group collectively owns about 23 million Northwest shares, according to a court filing in January.

Hedge Fund Analyst Claims Flaws in SEC Rules

Hedge Fund Analyst Justin Meyer submitted public comments on an SEC Rule Proposal that would change the standards for who could invest in a hedge fund, raising the minimum net worth values.

Meyer is the Senior research analyst for IncreMental Advantage, a Princeton-based best practices think tank that publishes and speaks on breaking developments in issues ranging from hedge funds to water utilities. He said, "The idea behind accredited investors is a good one, but the concept is flawed," said Meyer. "The SEC wants to equate net worth, or investable income with investment acumen. The two simply are not related."

In the existing public comments, there is a frequently-seen criticism of this proposed rule: the idea that investable income is equal to investment ability (or put another way, that money does not equal intelligence.)

Hedge funds are growing more and more sophisticated every day. There is no denying this, Meyer said, "It makes sense for the Commission to want to protect investors who might not be able to make a fully informed decision no matter how much information they are given, to ensure that those who are investing in funds that trade in high-risk ventures are not going to go broke if this investment fails."

Mr. Meyer continued, discussing what really mattered in hedge fund investing, saying that due diligence was the most important thing. "The rule is meant to ensure that someone investing in a 'risky' investment understands that risk and can absorb it if they lose their money."

"However, the key to understanding risk isn't having $5 million or $10 million. It's examining the investment and looking at who you are entrusting your money to, looking at how much risk they are taking on with the investment and how they manage the risk." Meyer said.