SEC Commissioner Walter Details Hedge Fund Enforcement and Extraordinary Efforts Being Made in Madoff Case
As the financial crisis deepens, SEC enforcement activities have focused intensely on a number of institutional players in the financial market, including hedge funds. According to Commissioner Elisse Walter, the huge number of liquidations and suspensions of redemptions by hedge funds in the past year have created particular concern at the Commission over whether hedge fund advisers may be favoring their own interests above others and whether principals, employees or favored investors of the advisers may have received preferential redemptions from the fund at issue. I
In testimony before the House Financial Services Committee, the official said that, in an effort to better detect any insider trading before material corporate events, the SEC’s Hedge Fund Working Group is developing technological tools that will enable staff to more readily capture patterns of unlawful trading by hedge funds and institutional traders. Separately, the commissioner described the extraordinary efforts the SEC is making in the SIPA liquidation of the Bernard Madoff Investment Fund, LLC, particularly the international initiative to uncover the Madoff feeder funds.
The SEC is focusing on a number of issues involving hedge funds and other institutional traders, including manipulation, insider trading, valuation of illiquid securities, abusive short selling and collusion. Working under the auspices of the Enforcement Division, the Hedge Fund Working Group is addressing these and other issues arising in investigations relating to hedge funds. The Hedge Fund Working Group works closely with SEC examiners, while at the same time coordinating with outside agencies and foreign regulators.
The commissioner said that the SEC has dozens of active investigations involving individuals associated with hedge funds. During the current crisis, the SEC has become particularly concerned about possible hedge fund offering frauds, where fraudsters use the non-transparent and largely unregulated status of hedge funds to conceal large Ponzi schemes. The SEC is also concerned with possible misconduct by funds of funds and feeder funds, which invested their own investors' funds with other hedge fund managers, but may have failed to exercise the due diligence and compliance oversight touted to investors regarding such investments.
The Commission has brought a broad range of enforcement actions involving hedge funds and institutional traders. While hedge funds are not required to register with the SEC, she noted, the Commission retains limited authority over hedge funds under the antifraud provisions of the federal securities laws. Despite the relative lack of regulation in this area, the Commission has brought over 100 cases involving hedge funds in the last five years, primarily under its antifraud authority.
In these actions, the SEC obtains asset freezes and other emergency relief to halt the alleged frauds. In addition, the Commission can seek permanent antifraud injunctions, disgorgement and civil penalties. In some cases, the SEC coordinates its actions with parallel criminal proceedings filed by the U.S. Attorney. The Commission also coordinates with other regulators that have filed related charges.
The Commission has also pursued numerous cases involving information leakage within the financial markets, particularly with respect to large financial institutions that may possess inside information about numerous clients, including hedge funds and other institutional traders. These include cases in which the SEC has charged large broker-dealers with having inadequate information barriers or other internal controls that prevent misuse of confidential inside information, such as allowing the firm's proprietary traders to have access to confidential information about upcoming research reports or about clients' upcoming mergers and acquisitions, as well as cases involving alleged misuse of such information about clients' trading activities.
Commissioner Walter also outlined the extraordinary efforts being made by the SEC to recover funds for investors in the massive Bernard Madoff Ponzi scheme. While the SIPA liquidation of the Madoff investment firm proceeds apace, the SEC has been probing all facets of the scheme to secure assets for investors. The SEC has committed considerable enforcement and examination resources to this effort, including 18 enforcement attorneys and investigators in the New York Regional Office, 30 examiners from New York and three other regional offices around the country.
In addition, emphasized the commissioner, the SEC is coordinating its investigations with numerous domestic and international agencies, such as the Justice Department, the FBI, the SIPC, the UK Financial Services Authority and a court-appointed receiver in the UK, as well as various other European securities regulators. One aspect of this international coordination is identifying Madoff feeder funds.
The Commission is also working with the Department of Labor with respect to ERISA plans that invested pension funds with the Madoff firm, as well as with FINRA and Attorneys General and regulators from various states that are also interested in investigating the Madoff fraudulent scheme.