In the last five years, there has been a spate of high-profile enforcement actions against hedge funds by the US Securities and Exchange Commission (“SEC” or “Commission”) as well as other federal and state regulators and even prosecutors. Indeed, the SEC cited hedge fund fraud as a justification for requiring hedge fund advisors to register with the Commission. As with everything else, there is both good news and bad news. The bad news, according to the SEC, is that “[i]n recent years, the Commission has instituted a significant number of actions alleging hedge fund fraud.” The good news, also according to the SEC, is that “there is no evidence indicating that hedge funds or their advisors engage disproportionately in fraudulent activity.” The latter is particularly true when you consider the magnitude of frauds that occurred outside the hedge fund industry – such as Enron, Adelphia and WorldCom – in which investors lost billions of dollars.
In light of the SEC’s focus on hedge fund misconduct, and in light of the handful of headline-grabbing hedge fund frauds, it is important for funds of funds, institutional investors, and other investors to understand how best to avoid becoming a victim of the relatively few instances of hedge fund fraud. This paper aims to highlight some of the more spectacular instances of hedge fund misconduct cases and provide ways in which investors can protect themselves from fraud. Please to read the rest of the article
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