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Regulators review complaints about hedge funds' research

Date: Thursday, January 23, 2003

"For decades, companies have complained that short-sellers were ganging up unfairly to drive down the price of their stocks," writes Randall Smith in today's Wall Street Journal. "Now, they have the ear of regulators. In recent days, New York Attorney General Eliot Spitzer and the enforcement staff of the Securities and Exchange Commission have been listening to complaints that hedge funds -- private-investment pools that typically cater to wealthy investors -- could be working together behind the scenes to push around stock prices in a bid to bolster their trading positions, people familiar with the matter said." "While companies with soured stock prices have long blamed short-sellers who bet on stock-price declines -- rather than any missteps by the companies themselves -- Mr. Spitzer and the SEC are examining complaints from companies whose stocks were hit after negative research by hedge funds. The companies include MBIA Inc.; Federal Agricultural Mortgage Corp., known as Farmer Mac; and Allied Capital Corp." "The companies say various hedge funds were working in concert, at times with Gotham Partners Management Co., to spread negative information about their stocks, the people say. A lawyer for Gotham declined to comment. The other hedge funds include Greenlight Capital LLC, Aquamarine Fund Inc., and Tilson Capital Partners LLC, the people say. Mr. Spitzer already has launched an investigation into whether Gotham misled investors with inaccurate stock research; both Gotham and its lawyer declined to comment, as did Mr. Spitzer's office. (Gotham is unrelated to Gotham Capital LLC.)" "It isn't clear whether or how actively the regulators would probe any possible improper collusion or manipulation by hedge funds and short-sellers, who sell borrowed securities in hopes of making a profit by buying an equal number of shares later at a lower price to replace the borrowed securities. Nor is it clear whether any of the alleged conduct at issue would violate any rules, particularly because communication among shareholders was liberalized a decade ago and hedge funds are subject to less regulation than other Wall Street players." "The complaints come as the SEC staff is wrapping up a broad review of hedge funds with an eye toward boosting regulation or oversight. A decision on what to do with the broader probe -- which includes pricing of illiquid securities in funds, trading commissions, and how the funds are marketed to investors -- awaits William Donaldson, the SEC's new commissioner." "The latest batch of complaints could be a litmus test of whether regulators will go after hedge funds in 2003 the way they did stock-research analysts in 2002, in regulatory probes of allegations that investment-banking fees led to overly bullish Wall Street research. Eleven Wall Street firms have agreed to pay $1.4 billion under a pending global settlement of those probes reached last month."