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SEC steps up probes of hedge insider trading
September 26, 2007 / 10:16 PM / in 10 years

SEC steps up probes of hedge insider trading

GREENWICH, Connecticut (Reuters) - The U.S. Securities and Exchange Commission is conducting more than 30 investigations into potential hedge fund manager misconduct in the northeast United States alone, with more in other parts of the country, officials said on Wednesday.

The investigations into potential insider trading, faulty asset valuation, conflicts of interest and other misdeeds are under way despite the agency’s setback last year when a federal court struck down a rule requiring the lightly regulated hedge funds to register as investment advisers.

“Whether you are registered or not, we at the enforcement division believe we have the tools to detect insider trading,” Bruce Karpati, New York-based assistant regional director for the SEC’s Division of Enforcement, said at a hedge fund conference in Connecticut.

“There are obviously active investigations on this front.”

Connecticut Attorney General Richard Blumenthal, an outspoken advocate on the need for more industry regulation, said the probes are likely to bear fruit in states like his, home to scores of multibillion-dollar hedge funds.

“There are indications that the investigations will be very productive,” Blumenthal said in a keynote speech at the event.

A spokesman for the SEC said the agency is conducting more than 30 investigations into possible hedge fund manager misconduct in the Northeast alone, with others elsewhere.

The SEC and other federal agencies are grappling with how best to regulate the rapidly expanding, $1.8 trillion hedge fund industry as it exerts a more powerful influence in the financial markets and the economy, but closely guards its secrecy and its complex trading strategies.

The SEC has made prosecuting insider trading at hedge funds a major priority this year, including probing ties between the funds and financial institutions that serve them in prime brokerage divisions, said Karpati, who heads an intra-agency working group set up six months ago with about two dozen executives.

Agency officials said they haven’t been deterred by the setback it suffered when a federal court struck down the rule that would have subjected the industry to such measures as spot financial audits, compliance manuals and increased disclosure

SEC officials said they have brought more than 100 cases in all against hedge fund managers in the last five years, more than ever before.

The working group is a forum to discuss lessons learned from those cases and share them with the staff.

Blumenthal, whose state has seen some of the biggest hedge fund debacles including the collapse of Long-Term Capital Management, Bayou Group and Amaranth Advisors, said any move toward increased federal regulation is all but dead for now.

“I see no immediate prospect of hedge fund regulations at the federal level,” said Blumenthal, who has tempered previous calls for greater hedge fund regulation. “I think Congress will be quiescent on this issue,” he said, adding that the “immediacy of the issue has been somewhat diminished.”

However, Blumenthal said his office is working closely with the SEC staff and that he supports proposed new SEC rules raising investor qualifications to invest in hedge funds.

The insider trading cases are separate from similar investigations that have led to recent arrests at major investment banks, Karpati said.

They are also separate from the SEC’s years-long probe into insider trading in so-called PIPEs, or private investments in public equity. The agency has brought nearly a dozen PIPE cases to date, including against hedge funds.

The event was organized by Strategic Research Institute.

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