Posted on 06/24/2006 11:16:12 PM PDT by sully777
BOSTON (Reuters) - U.S. financial regulators took a one-two punch on Friday that might leave their efforts to regulate the $1.3 trillion hedge fund industry in shambles.
"The regulatory landscape that the SEC has so carefully cultivated is now seriously in question," observed Jedd Wider, a partner at law firm Morgan Lewis.
The U.S. Securities and Exchange Commission will now have to go back to drawing board if it truly wants to put a tighter leash on an industry in which assets have doubled in five years. And that might take a long time, lawyers and investment managers said.
Early in the day, a former SEC lawyer described in detail how the agency last year quashed a probe into possible insider trading at a hedge fund later identified as Pequot Capital Management, one of America's best known funds with $7 billion in assets.
Hours later, a federal appeals court threw out the SEC's rule that required most U.S. hedge funds to register with the agency, thereby allowing SEC auditors to review their books and keep closer watch on them.
"It doesn't sound like it was a very good day for the SEC," said Richard Goldman, a partner at law firm Bingham McCutchen.
Lawyers, investment managers and industry analysts publicly agreed that the court's decision was the more important piece of news because it meant the SEC's hedge fund rule is essentially no longer in effect.
For months before the rule took effect in February, hedge funds had complained that it would be costly in terms of time and money to prepare more thorough records and establish better risk controls. Now, several hedge fund managers said, the efforts may have been for naught, and lawyers cautioned that it was too soon to say whether funds will deregister.
While the SEC publicly backed the rule under its former chairman William Donaldson and the rebuke by the court on Friday may look like a slap, it might actually be a welcome development for the new leadership, lawyers said.
"We had a changing of the guard at the SEC and given all the criticisms voiced by people including former Fed Chairman Alan Greenspan when the rule was being made, it may suggest that not enough thought was placed on figuring out the uniqueness of the industry," Bingham's Goldman said.
Pressure to regulate hedge funds appears to have weakened after Christopher Cox replaced Donaldson, one commissioner left and another is slated to go.
And now, there is another chance to review oversight methods.
"This ruling allows the SEC to go back and pull together data and analysis about the industry and consider a tailored approach for hedge funds that might be different from the rules for other money managers," said Elizabeth Fries, a partner at law firm Goodwin Procter.
Privately, people expressed much more fascination with the tale of intrigue that reached from Wall Street to Washington and starred a couple of the biggest names in banking and investment. Some said it was most interesting to see the SEC stand by in stony silence as the story spread.
The timing of the news of the investigation, first reported by the New York Times on Friday, may not have been accidental, some sources speculated suggesting that SEC staffers who favor stricter oversight may have been happy to leak it.
In a nutshell, a lawyer named Gary Aguirre, who was fired from his job at the SEC in September, said in a letter to two U.S. senators that the agency stifled a probe last year into a hedge fund, later identified as Pequot, because Aguirre wanted to subpoena the former chief executive of a large investment bank.
The New York Times said that government sources identified the person Aguirre was trying to question as John Mack, who now runs Morgan Stanley (MS.N: Quote, Profile, Research) after having briefly been Pequot's chairman.
After a year of silence, Aguirre told Senators Chuck Hagel and Christopher Dodd: "There is growing evidence that today's pools -- hedge funds -- have advanced and refined the practice of manipulating and cheating other market participants."
His message seems to have come just in time for lawmakers to mull over as they go back to the drawing board.
The whole reason hedge funds are booming is precisely because they are unregulated. There are few restrictions, and as a result you have a wild and wooly ecosystem that occasionally spawns brilliant ideas. Economics 101. Less regulation generates large average upside.
[Snip] "...The timing of the news of the investigation, first reported by the New York Times on Friday, may not have been accidental, some sources speculated suggesting that SEC staffers who favor stricter oversight may have been happy to leak it.
In a nutshell, a lawyer named Gary Aguirre, who was fired from his job at the SEC in September, said in a letter to two U.S. senators that the agency stifled a probe last year into a hedge fund, later identified as Pequot, because Aguirre wanted to subpoena the former chief executive of a large investment bank.
The New York Times said that government sources identified the person Aguirre was trying to question as John Mack, who now runs Morgan Stanley (MS.N: Quote, Profile, Research) after having briefly been Pequot's chairman.
After a year of silence, Aguirre told Senators Chuck Hagel and Christopher Dodd: "There is growing evidence that today's pools -- hedge funds -- have advanced and refined the practice of manipulating and cheating other market participants."
His message seems to have come just in time for lawmakers to mull over as they go back to the drawing board..."
The SEC had to horribly mangle the english language to try to come up with the reasons for the rule. And the court slapped it down as arbritrary. Also, a WSJ article said "But many hedge funds and other critics argue that the rule is cumbersome, costly and gives unskilled SEC staffers license to look for problems where none exist." Sounds like they were talking about what we are seeing with former SEC enforcement attorney Gary Aguirre...
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