8th Circuit Rejects Hedge Fund's Debt Collection Practice

The 8th U.S. Circuit Court of Appeals has become the first circuit in the country to rebuff efforts by a hedge fund to call in a debt based on an alleged technical violation of bond terms in a dispute over an $850 million note issued to United Health Group Inc.

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The investment tactic involves looking for a publicly traded company with bonds being traded below par value, where a technical violation can be asserted such as delayed reporting of filings to the U.S. Securities and Exchange Commission (SEC). The hedge fund buys the bonds, asserts there is a technical default on the bonds and uses that to force the company to redeem the bonds at par value, creating an immediate profit for the hedge fund, according to Giuffra.