BusinessWeek – As if there weren’t enough controversy surrounding hedge funds, now the Securities & Exchange Commission is investigating suspicions that fund employees are engaging in insider trading.
It’s not the typical heard-it-from-a-friend-at-the-company stuff, either. In the last decade hedge funds have ventured into the deepest reaches of finance. They’ve gone from trading stocks and bonds to making loans, participating in private placements, sitting on bankruptcy committees, and agitating for positions on corporate boards. In the process they’ve obtained all sorts of nonpublic information — and regulators are worried that many have been mismanaging it at best and illegally profiting from it at worst.
The SEC, NASD, and Financial Services Authority in London have launched a flurry of probes. So far the inquiries have resulted in only a handful of insider-trading charges against hedge fund managers. But regulators expect the improper handling of insider information to be a big focus of enforcement actions in 2006. “Hedge fund assets have grown significantly, and there is a lot more competition for returns,” says Scott W. Friestad, an associate director at the SEC’s Enforcement Div. “In this situation people sometimes cut corners. We are devoting substantial resources to these investigations.” Steve Luparello, an executive vice-president for market regulation at NASD, agrees. “Hedge funds misusing nonpublic information is a growing issue,” he says.
