Thursday, September 28, 2006

NYSE Blames Increased Insider Trading on Hedge Funds

As the SEC struggles to find a way to legally regulate the hedge fund industry, there appear to be an increasing number of news articles which are negative to the industry. The latest is Dailyii.com reporting that the NYSE is expecting to refer 25% more insider trading cases to the SEC, and it says hedge funds may have something to do with the rise.

The SEC is clearly making a push to regulate the industry, and while they continue to attempt to make the case for regulation by these vague statements, they have not addressed the fact that they are simply do not have the staffing or budget to regulate the brokerage and mutual fund industry, nevermind the hedge fund industry.

The SEC's case for regulation is getting support from other sources. The Dailyii article makes reference to a study which discovered that four out of 10 mergers and acquisitions worth more than $1 billion had some "deviant trading behavior" before it, and quotes Professor John Coffee of Columbia University School of Law, who told the hearing that "intense competition" for better returns by hedge funds has resulted in more insider trading.

Interesting conclusions, but are there facts to support those conclusions? Insider trading cases are convoluted and often difficult to prove. While "deviant trading behavior" may be a sign of insider trading, it is also a sign of a volatile market, and it is difficult, if not impossible to conclude that such trading behavior is the result of insider trading, nevermind insider trading by hedge funds.
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