Post by jannikki on Nov 12, 2005 10:45:51 GMT -4
Unregulated Hedge Funds, What they mean to the Average Investor – June 23, 2005
David Patch
For anybody who has followed our markets these past few years, the controversy over Hedge Fund regulation has been a heavily heated and politically charged debate. The Fed. Chairman, Congress, and the Securities and Exchange Commission are all at odds over what should and should not be done with this rapidly growing venue of trading. It has now taken on international tones.
While Fed. Chairman Alan Greenspan has repeatedly touted the value of liquidity Hedge Funds bring to the markets; SEC Chairman William Donaldson stated publicly “How much fraud are you willing to accept for liquidity?” Then, just last week German Chancellor Gerhard Schröder debated with US Treasury secretary John Snow over the need to reign in control Hedge Funds. The Chancellor called for International Regulation of the Funds while Secretary Snow, speaking on behalf of Washington, chose status quo. And so the sides get drawn.
But lost in all the politics is a simple question – What do Hedge Funds bring to the average investor?
Hedge funds are considered investment pools for wealthy individuals and institutional investors looking for an alternative way of trading. Hedge Funds are provided with certain liberties that mutual funds are not, including such trading strategies as short selling. One significant liberty that is a major separation between a hedge Fund and a Mutual Fund is the lack of public disclosure of their holdings. But while Hedge Funds do not disclose their holdings to the public, these funds play a particularly dominant role in how our publicly traded securities act.
In a Bloomberg report today, an article claims U.K. regulators may increase scrutiny of the $1 trillion hedge fund industry because of concern that some managers may be “testing the boundaries of acceptable practice with respect to insider trading and market manipulation.”
Let’s put to test this concern with what we have learned about Hedge Funds in our markets over recent years.
It was 2002 when we first learned of the illegal practices of market timing and late trading in mutual funds. Wall Street Institutions, big and small, were all caught providing Hedge Funds opportunity to trade fund shares after 4 p.m. EST. The significance being that next day's fund price is set at 4:00 p.m. EST yet the trading taking place after 4:00 was based on previous day closing prices. The Hedge Funds were provided opportunity to either reduce losses or increase profits on the inside information of the days change in price. Rapid in and out trading of the Mutual Funds profited the Hedge Funds while hurting the Mutual Fund investors.
The result of this fraud has been an accumulation of well over $3 Billion in fines to Wall Street firms. The Hedge Funds, who benefited from the fraud, have barely been touched. Wall Street Institutions and investors in those institutions have covered the bill on the fraud. The unregulated Hedge Fund investment pools have basically been free to walk away with their profits.
The question to ask yourself is why? Why would firms provide opportunity to Hedge Funds that is otherwise not available to the general public? Why risk breaking the law for these investment pools? Is it because Hedge Funds are comprised of powerful individuals and institutions? Money talks! Does it also talk in our Government decisions?
Private Placement Financing [PIPE] deals are another way that Hedge Funds infuse money into the public markets. These funds are sought out to assist companies in generating cash during periods in time when cash is running thin. PIPE deals are typically covered with Company shares being exchanged for the cash provided.
In 2005 the SEC and NASD executed enforcement action against Hedge Fund manager Hilary Shane for entering into a 2001 PIPE deal with CompuDyne in which she illegally shorted the stock ahead of the prearranged deal. Shane was charged with the sale of unregistered securities but was also charged with trading on inside information. While Shane profited nearly $1 Million in the deal on the short selling trades, investors holding the security lost considerably as the stock sold down trading in ranges from $17.00/share to $12.00/share in the month the deal was executed.
As additional SEC and NASD enforcement actions developed, including charges filed against Friedman, Billings, and Ramsey, SG Cowen and Co. Managing Director Guillaume Pollet the media started to cover the issue of PIPE deals, Insider Trading, and stock manipulation. This prompted one Hedge Fund Manager, who wished to remain anonymous, to tell a reporter that if the SEC and NASD wanted to seek enforcement actions in this area they would not have to look very hard for cases; “It was standard practice.”
Maybe this is the concern coming out of the U.K regarding insider trading. But there is more.
Just this month the NASD brought a civil complaint against Scott Ryan and his firm Ryan and Co. (RYCO) for stock manipulation and securities fraud. The NASD Press Release alleges that RYCO set themselves up as a market maker in securities and then illegally short sold public securities for a minimum of 3 separate Hedge Funds. RYCO would use a market making exemption to naked short stocks for the funds whereby these funds would otherwise not be permitted to short the stocks. The press release further acknowledges that this was a very profitable business.
To profit off short selling these stocks can only go down. To allow Hedge Funds to naked short, sell shares that they have no means of delivering, these funds gained leverage over the investors aiding in the fall of the stock. The balance between supply and demand is affected. The impact would be that as the Hedge Funds profited, the investing public in these securities lost.
Due to the lack of registration requirements for Hedge Funds the NASD has no jurisdiction over the Hedge Funds involved in this case. The NASD is limited to taking action against RYCO while those who operate and invest in these funds will walk away with the ill gotten gains.
Again, you can only ask why. What motivates people to manipulate the markets and the innocent people who invested in these markets? The fact that Hedge Funds are investment pools of the wealthy, what type of integrity has our Government protected? What motivates the wealthy to steal more?
Have our markets simply become the epitome of the class separation we are seeing grow in this nation? Investment pools of the wealthy are protected and touted by federal agencies claiming they are operating in our best interests when in fact they are defrauding the average investor and devastating our economy.
In all of the cases but one listed above, the Hedge Funds involved have generally walked away with most of the ill-gotten gains. Lack of a requirement to register limits the authority of the regulators. In the case of Hilary Shane, the NASD was able to bring charges against her only because it was within the two years after she had terminated her registration with the NASD. In fact it was nearly 2 years to the week that these charges were filed. Another month and she too would have gotten away with it.
From across the ocean regulators and economists see what our Government is willing to overlook. Hedge Funds, while creating liquidity, are doing so at the risk of the remaining investors in these markets. These overseas regulators fear the funds managers will be “testing the boundaries of acceptable practice with respect to insider trading and market manipulation.” Something we already see today as evidenced above.
Failure to regulate and control the trading of Hedge Funds, as we do Mutual Funds, can only result in continued fraud and manipulation. Those that disagree need to speak out on why these events above transpired and why the general population of investors have foot the bill for the fraud conducted on behalf of the Hedge Fund.
“How much fraud are you willing to tolerate for liquidity?” Any ethical person would say none. Wall Street must have a zero tolerance policy if we are ever to achieve investor confidence. Today confidence is as lost as our economy. Only the crooks are enjoying it the fruits.
Unregulated Hedge Funds simply means uncontrolled losses to the Average Investor.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2005
David Patch
For anybody who has followed our markets these past few years, the controversy over Hedge Fund regulation has been a heavily heated and politically charged debate. The Fed. Chairman, Congress, and the Securities and Exchange Commission are all at odds over what should and should not be done with this rapidly growing venue of trading. It has now taken on international tones.
While Fed. Chairman Alan Greenspan has repeatedly touted the value of liquidity Hedge Funds bring to the markets; SEC Chairman William Donaldson stated publicly “How much fraud are you willing to accept for liquidity?” Then, just last week German Chancellor Gerhard Schröder debated with US Treasury secretary John Snow over the need to reign in control Hedge Funds. The Chancellor called for International Regulation of the Funds while Secretary Snow, speaking on behalf of Washington, chose status quo. And so the sides get drawn.
But lost in all the politics is a simple question – What do Hedge Funds bring to the average investor?
Hedge funds are considered investment pools for wealthy individuals and institutional investors looking for an alternative way of trading. Hedge Funds are provided with certain liberties that mutual funds are not, including such trading strategies as short selling. One significant liberty that is a major separation between a hedge Fund and a Mutual Fund is the lack of public disclosure of their holdings. But while Hedge Funds do not disclose their holdings to the public, these funds play a particularly dominant role in how our publicly traded securities act.
In a Bloomberg report today, an article claims U.K. regulators may increase scrutiny of the $1 trillion hedge fund industry because of concern that some managers may be “testing the boundaries of acceptable practice with respect to insider trading and market manipulation.”
Let’s put to test this concern with what we have learned about Hedge Funds in our markets over recent years.
It was 2002 when we first learned of the illegal practices of market timing and late trading in mutual funds. Wall Street Institutions, big and small, were all caught providing Hedge Funds opportunity to trade fund shares after 4 p.m. EST. The significance being that next day's fund price is set at 4:00 p.m. EST yet the trading taking place after 4:00 was based on previous day closing prices. The Hedge Funds were provided opportunity to either reduce losses or increase profits on the inside information of the days change in price. Rapid in and out trading of the Mutual Funds profited the Hedge Funds while hurting the Mutual Fund investors.
The result of this fraud has been an accumulation of well over $3 Billion in fines to Wall Street firms. The Hedge Funds, who benefited from the fraud, have barely been touched. Wall Street Institutions and investors in those institutions have covered the bill on the fraud. The unregulated Hedge Fund investment pools have basically been free to walk away with their profits.
The question to ask yourself is why? Why would firms provide opportunity to Hedge Funds that is otherwise not available to the general public? Why risk breaking the law for these investment pools? Is it because Hedge Funds are comprised of powerful individuals and institutions? Money talks! Does it also talk in our Government decisions?
Private Placement Financing [PIPE] deals are another way that Hedge Funds infuse money into the public markets. These funds are sought out to assist companies in generating cash during periods in time when cash is running thin. PIPE deals are typically covered with Company shares being exchanged for the cash provided.
In 2005 the SEC and NASD executed enforcement action against Hedge Fund manager Hilary Shane for entering into a 2001 PIPE deal with CompuDyne in which she illegally shorted the stock ahead of the prearranged deal. Shane was charged with the sale of unregistered securities but was also charged with trading on inside information. While Shane profited nearly $1 Million in the deal on the short selling trades, investors holding the security lost considerably as the stock sold down trading in ranges from $17.00/share to $12.00/share in the month the deal was executed.
As additional SEC and NASD enforcement actions developed, including charges filed against Friedman, Billings, and Ramsey, SG Cowen and Co. Managing Director Guillaume Pollet the media started to cover the issue of PIPE deals, Insider Trading, and stock manipulation. This prompted one Hedge Fund Manager, who wished to remain anonymous, to tell a reporter that if the SEC and NASD wanted to seek enforcement actions in this area they would not have to look very hard for cases; “It was standard practice.”
Maybe this is the concern coming out of the U.K regarding insider trading. But there is more.
Just this month the NASD brought a civil complaint against Scott Ryan and his firm Ryan and Co. (RYCO) for stock manipulation and securities fraud. The NASD Press Release alleges that RYCO set themselves up as a market maker in securities and then illegally short sold public securities for a minimum of 3 separate Hedge Funds. RYCO would use a market making exemption to naked short stocks for the funds whereby these funds would otherwise not be permitted to short the stocks. The press release further acknowledges that this was a very profitable business.
To profit off short selling these stocks can only go down. To allow Hedge Funds to naked short, sell shares that they have no means of delivering, these funds gained leverage over the investors aiding in the fall of the stock. The balance between supply and demand is affected. The impact would be that as the Hedge Funds profited, the investing public in these securities lost.
Due to the lack of registration requirements for Hedge Funds the NASD has no jurisdiction over the Hedge Funds involved in this case. The NASD is limited to taking action against RYCO while those who operate and invest in these funds will walk away with the ill gotten gains.
Again, you can only ask why. What motivates people to manipulate the markets and the innocent people who invested in these markets? The fact that Hedge Funds are investment pools of the wealthy, what type of integrity has our Government protected? What motivates the wealthy to steal more?
Have our markets simply become the epitome of the class separation we are seeing grow in this nation? Investment pools of the wealthy are protected and touted by federal agencies claiming they are operating in our best interests when in fact they are defrauding the average investor and devastating our economy.
In all of the cases but one listed above, the Hedge Funds involved have generally walked away with most of the ill-gotten gains. Lack of a requirement to register limits the authority of the regulators. In the case of Hilary Shane, the NASD was able to bring charges against her only because it was within the two years after she had terminated her registration with the NASD. In fact it was nearly 2 years to the week that these charges were filed. Another month and she too would have gotten away with it.
From across the ocean regulators and economists see what our Government is willing to overlook. Hedge Funds, while creating liquidity, are doing so at the risk of the remaining investors in these markets. These overseas regulators fear the funds managers will be “testing the boundaries of acceptable practice with respect to insider trading and market manipulation.” Something we already see today as evidenced above.
Failure to regulate and control the trading of Hedge Funds, as we do Mutual Funds, can only result in continued fraud and manipulation. Those that disagree need to speak out on why these events above transpired and why the general population of investors have foot the bill for the fraud conducted on behalf of the Hedge Fund.
“How much fraud are you willing to tolerate for liquidity?” Any ethical person would say none. Wall Street must have a zero tolerance policy if we are ever to achieve investor confidence. Today confidence is as lost as our economy. Only the crooks are enjoying it the fruits.
Unregulated Hedge Funds simply means uncontrolled losses to the Average Investor.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2005