The SEC is cracking down on more hedge funds, but does it really matter?
Even impressive conviction rates and the seizure of hundreds of millions in illegal earnings is only a drop in the bucket.
The Wall Street Journal reported on the crackdown in an article titled “FBI Sweep Targets Big Funds.” The latest alleged scheme involved at least seven people. According to the Journal, $62 million was “earned through tips provided by a Dell employee to a former Dell worker who spread the information among his friends in at least five investment firms, including three hedge funds.” The Journal has run many similar stories during the past year.
For a $10 billion hedge fund, $50 million represents less than 1 percent of assets under management.
Don't misunderstand me — securities fraud and information trafficking are wrong.
The problem is that with the limited resources which regulators have, they should be focusing on much larger issues.
So why are regulators targeting hedge funds specifically? Why not focus on MF Global, where more than $1 billion in investor money went missing?
There are probably two reasons: It is good PR for the SEC; and hedge fund victories provide distraction from what many Americans wish the authorities would focus on instead: the banks.
“Since late 2009, the government has secured 56 guilty pleas or convictions out of 63 people charged with insider trading,” the Journal article stated.
Most people cannot identify with hedge fund investors, who have to be qualified investors to commit money. Hedge fund money comes from very wealthy individuals and institutions. When will this come to an end?
William Black, of “New Economic Perspectives,” asked a similar question recently, stating that “The (systemically dangerous institutions) SDIs are the financial institutions that are so large that the administration fears that their failure will cause a new global crisis…There is no indication that the SEC intends to use [trade pattern identification technology] to spot fraudulent SDIs…There is no indication that the WSJ reporters asked why the SEC was failing to use its system where it was most needed…Why isn’t the SEC’s top priority the systemically dangerous institutions (SDIs)?”
We think we have the answer to the question but wish we didn't: as long as the authorities are more concerned about political and getting good PR in the press, the outlook for real action against financial fraud remains bleak.
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