Prime SEC Time For Hedge Funds, Brokerages

The Securities and Exchange Commission is poised to take legal action against wayward hedge funds – and the firms that lend them money, too.

The Securities and Exchange Commission is poised to take legal action against wayward hedge funds – and the firms that lend them money, too. Speaking at a Securities Industry Association seminar, SEC Director of Enforcement Linda Thomsen, says more lawsuits against hedge funds are on the way. “I expect to see activity” in connection with illegal trading and possible harm to HF investors, she said. Prime brokerages also have reason to be nervous. Susan Merrill, head of enforcement at The New York Stock Exchange, told attendees that prime brokerages may be held accountable for the sins of their hedge fund clients by not being vigilant about such activities as illegal short-selling or intending to pay for transactions with shares the HFs would buy in a company’s secondary stock offering. In addition, prime brokerages – especially those that underwrite an offering— can’t claim ignorance since she said they have sufficient information to be able to detect illegal hedge fund activity. Ms. Thomsen noted the increase litigation is not because they’re hedge funds per se, but because regulators traditionally follow the money and, she said, “These days, the money is in hedge funds so the potential for abuse, the potential for securities law violations is there because there is so much money there.”