SEC to Press More Hedge-Fund Cases, Thomsen Says

Date: Monday, November 13, 2006
Author: David Scheer, Bloomberg.com

Nov. 13 (Bloomberg) -- The U.S. Securities and Exchange Commission expects to file more enforcement actions against hedge funds over illegal trading and violations of client trust, the agency's head of enforcement said.

The SEC is ``worried'' about both kinds of misconduct, Linda Thomsen, the agency's director of enforcement, said at a securities conference in New York today. ``I expect to see activity in connection with both,'' she said.

Prime brokerages, which lend to hedge funds and arrange their trades, must also become more vigilant in watching for illegal conduct, Susan Merrill, the head of enforcement at the New York Stock Exchange, said at the conference.

Regulators and lawmakers have grown more concerned about hedge-fund oversight since a federal appeals court in June shot down SEC rules requiring them to register and submit to random inspections. The largely unregulated pools of private capital have more than $1.3 trillion in assets worldwide, more than double the amount under management five years ago, according to Hedge Fund Research Inc. in Chicago.

Regulators have repeatedly learned to ``follow the money,'' the SEC's Thomsen said today. ``These days, the money is in hedge funds, so the potential for abuse, the potential for securities law violations is there because there is so much money there.''

Insider Trading

SEC Chairman Christopher Cox last month said the agency will focus more on potential insider trading by hedge funds, because of suspicious buying and selling ahead of corporate mergers. In an interview last week, Cox said the SEC will propose rules in December to raise hedge-fund investors' asset requirements.

Prime brokers may also be held accountable if they fail to detect signs that hedge funds are conducting improper trades, such as selling a company's stock short and intending to cover the transaction with shares to be purchased in the company's secondary stock offering, NYSE Regulation's Merrill said.

If the prime broker is also among banks in the syndicate underwriting the offering, then it has enough information to detect the hedge fund is intending to cover the short sale illegally, she said.

``We do expect member firms to put that information together,'' Merrill said. ``There will be actions related to that if that practice doesn't get cleaned up.''

Primer brokers clear trades for hedge funds, lend securities to cover short sales, provide margin financing, and provide cash for leveraged positions. They also provide technology and are go- betweens for the funds and other broker-dealers.

To contact the reporters on this story: David Scheer in Washington at dscheer@bloomberg.net .