When the Senate judiciary committee announced it was holding hearings on hedge funds a lot of people scratched their heads and wondered why this wasn’t something that would be taken up by the banking committee, which has oversight over the SEC and financial market regulation. Even some of members of the banking committee wondered about this, worried the judiciary committee was infringing on their turf.
Well the quick answer to why the judiciary committee started looking into hedge funs was: to get the US Justice Department involved. The judiciary committee has oversight responsibilities for U.S. prosecutors, and holding hearings was a way of putting the Justice Department on notice that the Senators expected them to start paying more attention to the hedge fund industry. It was a loud and clear message: “Don’t leave this to the SEC!”
And sure enough, the Justice Department’s taskforce on corporate crime is about to start looking into hedge fund fraud.
Fraud in the $1.2 trillion hedge-fund industry poses an ``emerging threat'' to investors, the head of the Bush administration's task force on corporate crime said in an interview.
Deputy Attorney General Paul McNulty said the potential for wrongdoing in the lightly regulated investment pools makes them ripe for scrutiny by prosecutors, regulators and investigators. The corporate-fraud task force is also studying the scandal involving backdating stock options for executives, he said.
The task force will discuss hedge-fund fraud at its next meeting at the end of this month, McNulty said. ``There's been some interest in the media recently on hedge funds, and that would be a good example of an emerging threat that we would want to talk about and ensure that we are handling,'' he said.
It's also interesting that the taskforce is looking into backdating. While the SEC is pondering rules or guidelines regarding options timing, prosecutors may be drawing up arrest warrants. In short, just cause commissioner Atkins says your 'well-timed' options look okay to him don't think you are immune to the law coming down on you.
Hedge-Fund Fraud Is `Emerging Threat,' McNulty Says [Bloomberg]