US SEC probing hedge fund investor trading schemes

By Dane Hamilton

NEW YORK, Dec 5 (Reuters) - The U.S. Securities and Exchange Commission, which recently stepped up probes of hedge funds, is looking at whether banks and others are investing in hedge funds to share inside information, an SEC official and securities lawyers said on Wednesday.

The probes are based on concerns that public company investors such as banks or others may invest in hedge funds to gain access to their strategies which may move stock prices, lawyers who are familiar with the probes said.

"The SEC is concerned that there is an underground flow of inside information," said Paul Roth, partner in Schulte Roth & Zabel, a New York law firm with a large roster of hedge fund clients. But he said he does not believe such practices are widespread.

Roth, speaking at a New York conference on Wednesday, said he has represented hedge fund clients who were questioned about their investors by the SEC at its regional New York office, where the agency established a task force to probe misdeeds in the fast-growing $1.9 trillion hedge fund industry.

Bruce Karpati, assistant regional SEC director who heads the task force, acknowledged the agency has on-going investigations into sharing of inside information between hedge funds and banks, brokers or other public companies that may take ownership stakes in hedge fund management companies.

"As part of the hedge fund working group, we are looking at issues such as sharing of inside information by strategic investors into hedge funds," said Karpati in an interview.

He declined to elaborate.

The agency disclosed last September that it is conducting more than 30 investigations into misdeeds involving hedge funds through its Northeast office alone and more in other parts of the country.