Regulatory McCarthyism

I thought I was being a bit harsh when I called the attempt at hedge fund regulation "Bureacuracy withhout Benefit." Jonathan Macey, a professor at Yale Law School labels the attempts "Regulatory McCarthyism" in this op-ed piece in today's Wall Street Journal.

You will need a subscription to read the piece, and while the title is a bit over the top, the professor is right when he takes on the new justification for hedge fund regulation - "systemic risk" to the markets and our economy.

Skilling sentenced to 24 years in prison

Reuters - "Former Enron CEO Jeffrey Skilling, the most vilified figure from the financial scandal of the decade, was sentenced Monday to 24 years, four months in the harshest sentence yet from the energy trading giant's collapse."

NASD faults Citizens securities arm for rules infractions - The Boston Globe

The securities broker-dealer unit of Citizens Financial Group in Rhode Island was fined $850,000 by the NASD for what the NASD labeled were some of the broadest violations it has found since new rules allowed banks into the area seven years ago, including failure to properly supervise areas like telemarketing, college-savings-plan sales, and the sale of complex vehicles to older investors.

Merrill Lynch Net Income 3 BILLION Dollars

Here is an understatement - Merrill Lynch 3rd-qtr net income rises sharply. Merrill reported 9 billion dollars in revenue, and 3 BILLION in net income.

Massive Increase In Reg D Fraud?

Dan Jamieson over at InvestmentNews has an interesting article on an alleged increase in securities fraud, where the scanners are using Reg D to add legitimacy to fraudulent offerings.

The article contains a number of quotes from state securities regulators who are bemoaning the fact that they can no longer require a merit review of offerings in their state, which they claim is leading to an increase in fraud. NSMIA pre-empted state merit review of offerings, leaving the SEC as the only entity with the authority to review the offerings.

Also of interest are various comments regarding the inability of the SEC to conduct any review of those offerings, citing staffing and budget concerns.

And Congress wants to have them review hedge funds? The SEC is understaffed as it is, and unable to perform its function. Congress keeps adding responsibility, without funding, all to the detriment of investors, and the markets.

Hgh-Tech Worries for Online Brokerage Accounts

Online brokerage account 'incursions' are a concern for the SEC. ZNet is reporting that crooks are hijacking online brokerage accounts using spy-ware and operating from remote locations, sometimes in Eastern Europe.

Connecticut Trying to Oversee Hedge Funds

Connecticut has announced the creation of a special unit inside of its bureau of securities to "oversee" the hedge fund industry. According to Investment News - "[s]idestepping at least two failed attempts this year by Connecticut lawmakers to introduce new rules related to hedge fund oversight, the state's department of banking has created a hedge fund unit to help oversee what is estimated to be among the largest concentrations of hedge funds in the country."

The SEC's failed attempt to regulate hedge funds is undoubtedly behind this move, but we can't help but wonder how the State plans to go about doing anything more than conducting investigations and reviews. No new regulations have been enacted, funds and managers are still not required to register.

While the article derides the state for its efforts, Connecticut may actually have taken a positive step. The state admits that it does not understand hedge funds as well as it could, and is going to correct that lack of information. Once they, and the SEC, do in fact understand hedge funds, they will understand that they have all the tools that they need in their possession to root out, and yes, even prevent, fraud, without additional rules, regulations and the burden of bureaucracy.

Insider Trading Hard to Prove?

I thought this was an interesting statement. In connection with dropping its investigation of Pequot Capital Management Inc. on insider trading allegations, the Washington Post discusses the investigation and finishes with the statement "without e-mails, documents or an outright admission by someone involved in a case, insider trading charges can be difficult for regulators to prove."

Is that where enforcement proceedings have evolved? If there is no email, there is no case? I have been defending insider trading cases since 1985. Believe me, the SEC can put together a very compelling case without emails, and without admissions. They have been doing it for years. In fact, the most famous insider trading cases were brought before email existed, and the balance were brought without email or admissions.

Believe me. The NASD and the NYSE have professionals watching the market every minute of every day. They will notice unusual trading, and they will investigate. To suggest that they need an email trail to move forward with a prosecution is to demean the varied prosecutors and the market surveillance teams at the exchanges, and to encourage insider trading.

They can catch it, they will catch it, and they will prosecute it. At the same time, they will go after innocent people who did not trade on inside information. Those people need the courage, and the professionals, to defend themselves, and can do so successfully.

But to suggest that admissions and emails are the only road to a successful prosecution is downright silly.

Hedge Fund Escapes Charges - washingtonpost.com

For all of the commotion and controversy that went on regarding the investigation, the Washington Post is reporting that the SEC staff will recommend that the agency not pursue insider trading charges against $7 billion hedge fund Pequot Capital Management Inc., its management team, and former chairman John J. Mack.

How much press time will this get? A hedge fund does nothing wrong, Mack does nothing wrong, and the press will let it go by, unnoticed.

Calif. seeks indictment of ex-HP chairman Dunn

According to Reuters California's attorney general filed a criminal complaint on Wednesday seeking indictments of former Hewlett-Packard Co. Chairman Patricia Dunn and four others for their roles in a probe into board leaks. Mark Hurd was not named, and the Reuters report does not contain any other details.

US House passes bill to study hedge fund oversight

More regulation in a heavily regulated industry is usually not the answer, but the SEC and Congress keep trying to regulate the hedge fund industry. The SEC's original attempt was based on a number of seriously flawed premises and now that it has been rejected by the courts, Congress is putting its figurative toe in the hedge fund waters.

The House has passed a bill to conduct a study of hedge funds, and the industry is waiting to see if the Senate passes a similar bill. We can only hope that Congress' study is more detailed and accurate than the "study" performed by the SEC which was sharply criticized.

Can we also hope that the study includes a study of the SEC's ability to perform any regulatory oversight that may arise? Adding more power and responsibility to an overburdened, understaffed and underfunded government agency will not benefit anyone. In fact, taking such a course may hurt the very investors Congress is attempting to protect.

Our commentary on the issue is at SECLaw.com, Registration of Hedge Fund Managers - Bureaucracy Without Benefit.