SEC Throws Weight at Hedge Funds

Date: Friday, November 6, 2009
Author: Zusha Elinson, The Recorder, law.com

The government has been sniffing around hedge funds for years and now, like a dog that's found where the bone is buried, it has started digging.

Last month, authorities charged six in a vast insider trading ring involving New York hedge fund Galleon Group. Last Friday, the Securities and Exchange Commission charged the former executives of two San Francisco funds with another insider trading conspiracy. And on Tuesday, Alexander Trabulse, a Colma hedge fund manager who authorities say bilked investors out of $8.3 million, pleaded guilty to mail fraud charges.

"For years, the SEC has been talking about hedge funds, and for the last year the SEC has focused more on insider trading in particular, and now we're starting to see the fruits of that initiative," said Jahan Raissi, a partner at Shartsis Friese in San Francisco.

Raissi is getting a first-hand view. Client Chen Tang is at the center of the SEC's most recent insider trading case. Tang, former CFO at San Francisco private equity fund Friedman Fleischer & Lowe, is accused of using inside information about market moving positions his fund was taking in mattress company Tempur-Pedic International to trade and pass tips to his friends and relatives.

Also charged is Ronald Yee, Tang's brother-in-law, who was CFO of ValueAct Capital, a San Francisco venture capital fund. Yee allegedly passed tips about ValueAct's bid for Acxiom to Tang, who traded on the information and passed the tip to others. In all, the six defendants made $8 million off the trades, the SEC alleges.

Yee, represented by Keker & Van Nest's Michael Celio, and Tang are fighting the charges.

The SEC has made clear that it wants blood from the largely unregulated hedge fund industry.

"We at the SEC are committed to pulling back the curtain on hedge fund operations and taking a close look at their activity," said SEC top cop Robert Khuzami at a news conference on the Galleon case in October.

The San Francisco SEC office has not been involved in either the Galleon case, which was brought by the New York office, or the Tang case, brought by Texas. But local enforcement director Michael Dicke said his charges have some open investigations into hedge funds, although he declined to elaborate.

"As part of the overall insider trading surveillance, we certainly look at hedge fund trading," he said. "[It's] the fact that they're big market participants ... that's the number one reason."

Shartsis Friese's Raissi has a different take on why they're the targets. "There's a largely incorrect perception that hedge funds are the cowboys of Wall Street," said Raissi, a former SEC lawyer.

The cases have meant work for San Francisco Bay Area white-collar lawyers, who had seen a drop-off as the stock option backdating scandal waned. In the Galleon case, local firms are involved because the hedge fund allegedly got inside tips and traded in the stocks of local tech companies. For example, Orrick, Herrington & Sutcliffe is conducting an internal investigation at Intel Corp., while Wilson Sonsini Goodrich & Rosati has been probing Polycom Inc.

The Tang case has also provided some work. Aside from Raissi and Celio, Fenwick & West's Christopher Steskal is representing two of the other defendants, Ming Siu and Zisen Yu.