Scrutiny Urged for Hedge Funds
Thursday, June 29, 2006
Connecticut Attorney General Richard Blumenthal (D) urged Congress yesterday to heighten federal scrutiny of the secretive hedge fund industry or face the prospect of a patchwork group of state authorities stepping in to monitor the rapidly growing investment pools to prevent fraud.
Blumenthal, whose state is the headquarters for scores of hedge funds, told the Senate Judiciary Committee that last week's federal appeals court ruling striking down oversight of the funds by federal regulators left investors "in a regulatory void, without any disclosure or accountability."
If federal authorities "abandon the field, as they have at some other points in history," Blumenthal testified, the states will intervene.
Hedge funds, which committee Chairman Arlen Specter (R-Pa.) called "an area where there is so much opportunity for manipulation and such enormous profits," are increasingly appearing on state and federal regulators' radar screens.
The Securities and Exchange Commission has lodged nearly 80 enforcement cases against funds and their advisers in the past five years. In September, two executives at fund Bayou Group pleaded guilty to criminal fraud charges. The men await sentencing.
But after an appeals court in Washington tossed out a rule Friday requiring hedge fund advisers to provide information and open their books for inspection, oversight of the funds has been thrown into chaos. Rep. Barney Frank (D-Mass.) said yesterday that he will introduce a proposal to give the SEC authority to oversee hedge funds.
Lawmakers concur that the funds, which account for about 30 percent of trading each day on the New York Stock Exchange, play an important role in the economy. But they appear to disagree on who should oversee them, and how much.
Sen. Orrin G. Hatch (R-Utah) yesterday expressed concern about the funds' impact on the market but quickly added that he was "not necessarily calling for new regulations here." In fact, Hatch said, he had "real questions" about whether Congress should impose more rules on the funds, which he called "the Wild West of our financial markets."
Sen. Charles E. Schumer (D-N.Y.) made a brief appearance at the hearing to insist that the Senate Banking panel, not the Judiciary Committee, had "exclusive oversight of hedge funds."
And Marc E. Kasowitz, a lawyer who is suing hedge funds on behalf of disgruntled companies that claim they have been damaged by the funds' activities, pointed out that the investments are so shrouded in secrecy that witnesses who testified yesterday could not agree on their value. Specter said $1.2 trillion, a representative of a trade association for hedge funds cited $1.5 trillion, and the Securities and Exchange Commission previously used the figure $2.4 trillion.
"No one even knows within a trillion dollars how large the hedge fund industry is," Kasowitz said.
The hearing also offered a platform for former SEC lawyer Gary J. Aguirre, who maintains he was fired last year after fighting with supervisors over efforts to interview the subject of an insider-trading investigation involving hedge fund Pequot Capital Management. Pequot has said it did nothing improper.
Aguirre testified that he tried to interview Morgan Stanley chief John J. Mack, a former Pequot official, whom he had identified as "the top possibility" on a list of people who could have tipped off the fund to nonpublic information. But, he said, the probe came to a "grinding halt" after Morgan Stanley called the agency to inquire about the status of and Mack's role in the investigation. Mack has ties to the Bush administration, and Aguirre says political pressure stopped the probe in its tracks.
The SEC's inspector general did not find evidence to support the allegations. Aguirre told lawmakers yesterday that he would not provide details about the investigation because the SEC had reminded him in advance of his testimony about rules "prohibiting the disclosure of nonpublic and confidential information" about ongoing probes. An SEC spokesman declined comment yesterday.
"No one has provided any evidence that Mr. Mack has engaged in any wrongdoing, and Mr. Aguirre provided none today," a Morgan Stanley spokeswoman said in a statement.
"Integrity is the overriding key value of the enforcement division, and we welcome any congressional interest," said Walter G. Ricciardi, a deputy director of enforcement at the SEC.