Breech of Trust Between Hedge Funds and Clients
November 13, 2006

It is remarkable that the Security and Exchange Commission has decided to file lawsuits against hedge funds for violation of trust with their clients. It seems the SEC has been forced now to sue hedge funds for violating their clients' trusts. It is not clear, though, if the SEC suing for the same kind of violation of clients' trust as the "breech of trust" between hedge fund principals (hedge funds floated by brokerages and mutual fund company principals) and their clients (brokerages' clients and mutual fund investors) as raised in my letter to U.S. Congress, dated March 1, 2005. If it is, then it is a remarkable achievement of our campaign to clean up the Great Depression era laws on short-selling of financial securities. We have to see if the U.S. Congress legislates new law to ban short-selling of securities by borrowing clients' securities that hedge funds seem to be doing.

Sankarshan Acharya     

Citizens for Development
and Founder, Pro-Prosperity.Com

SEC to Press More Hedge-Fund Cases, Thomsen Says (Update2)

By David Scheer

Nov. 13 (Bloomberg) -- The U.S. Securities and Exchange Commission expects to file more lawsuits accusing hedge funds of illegal trading and violating their clients' trust, the agency's chief enforcer said.

At the same time, Wall Steet's prime brokerages, which lend to hedge funds and process their trades, may be held accountable if they fail to catch illegal conduct, a senior official at the New York Stock Exchange said.

Federal regulators are ``worried'' about both illegal trading and the potential for harm to hedge-fund investors, Linda Thomsen, the SEC's enforcement director, said at a securities conference in New York today. ``I expect to see activity in connection with both,'' she said.

Lawmakers and regulators and have grown more concerned about hedge-fund oversight as the pools of private capital proliferate. The largely unregulated funds now have more than $1.3 trillion in assets worldwide, more than double the amount under management five years ago, according to Hedge Fund Research Inc. in Chicago. Hedge funds allow managers to participate substantially in the gains of the money invested.

Regulators have repeatedly learned to ``follow the money,'' the SEC's Thomsen said today. ``These days, the money is in hedge funds, so the potential for abuse, the potential for securities law violations is there because there is so much money there.''

Prime Brokers

Prime brokers may also be held accountable if they fail to detect signs that hedge funds are conducting improper trades, such as selling a company's stock short and intending to cover the transaction with shares to be purchased in the company's secondary stock offering, Susan Merrill, NYSE's enforcement chief, said at the conference.

If the prime broker is also among banks in the syndicate underwriting the offering, then it has enough information to detect the hedge fund is intending to cover the short sale illegally, she said.

``We do expect member firms to put that information together,'' Merrill said. ``There will be actions related to that if that practice doesn't get cleaned up.''

Wall Street's prime brokers, which include Goldman Sachs Group Inc., Morgan Stanley and Bear Stearns Cos., lend securities, process trades and hold assets in custody to help managers run their hedge funds. They also provide technology and are go-betweens for the funds and other broker-dealers.

SEC Chairman Christopher Cox last month said the agency will focus more on potential insider trading by hedge funds, because of suspicious buying and selling ahead of corporate mergers. In an interview last week, Cox said the SEC will propose rules in December to raise hedge-fund investors' asset requirements.

Hedge funds are open to individuals with at least $1 million in assets or at least $200,000 in income for the past two years, and also institutions like insurance companies, mutual funds and pension funds.

To contact the reporters on this story: David Scheer in Washington at .

Last Updated: November 13, 2006 16:31 EST