SEC Widens Investigative Net to Catch Fund Fraud

The SEC is upping its game against hedge funds with returns too good to be true, reports the Wall Street Journal. “There is serious fraud in this space, and we have been attacking it,” said Bruce Karpati, co-chief of the SEC’s asset-management enforcement unit. There are roughly 100 funds on this new “most-wanted” list number and they each have just one thing in common – returns that fall outside the norm. Specifically, these funds are either “trouncing the overall market and others churning out modest results without ever suffering a down month,” making insider trading likely.

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The list is the product of the SEC’s latest efforts to crack down in hedge fund fraud. “After the agency failed to detect the $17.3 billion Ponzi scheme by Bernard L. Madoff, who wowed investors with steady returns over several decades, SEC officials decided they needed a way to trawl through performance data and look for red flags that might signal a possible fraud,” writes the Wall Street Journal. “In 2009, the SEC began developing a computer-powered system that now analyzes monthly returns from thousands of hedge funds.” Officials are keeping mum on how the system works and how much it cost to build, “but the agency has announced four civil-fraud lawsuits filed as a result of what it calls the “aberrational performance initiative.”

Encouraged by these results, the SEC is widening its net. Soon the computer-aided scrutiny will extend to mutual funds and private equity funds. The Wall Street Journal explains, “That means data on more than 20,000 funds are being fed into the SEC’s computers or soon will be,” leaving some fund managers to worry that they or their funds will be snagged in an investigation just for having good numbers.

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