U.S. lawyers busy as hedge funds face scrutiny

By Martha Graybow and Svea Herbst-Bayliss

NEW YORK/BOSTON, July 25 (Reuters) - It's turning into a busy summer for U.S. lawyers who advise hedge funds as the industry faces growing questions about potentially manipulative trading and regulators are knocking at fund managers' doors.

With the markets in turmoil, the loosely regulated sector is under increasing scrutiny. The U.S. Securities and Exchange Commission recently sent subpoenas to more than 50 firms regarding possibly abusive trading activity.

Some funds have sought advice to be sure they are complying with the rules, which include new limits on short-selling.

Others are calling for help to set up new funds as managers try to find ways to make money in a rough market.

On the regulatory front, hedge funds want to head off any potential problems, said John Brunjes, a partner in the private investment funds practice at law firm Bracewell & Giuliani.

"Our clients are saying, 'let us tell you what we are doing. Do we have a problem? Are we headed down a road that may create a problem?'" he said. "That kind of call is coming in with greater frequency."

The "better-managed funds that understand they can't be fast and loose around these kinds of developments in the marketplace are the ones that seem to be picking up the phone and calling," said Brunjes, who is based in Connecticut, where many hedge funds also have their headquarters.

The indictment in June of two former portfolio managers at Bear Stearns for allegedly deceiving clients about the health of two mortgage-linked hedge funds they ran has reverberated through the industry. The two men have pleaded not guilty.