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SEC’s Enforcement Chief Says Hedge Fund Fraud Is Rising

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From Bloomberg News

The Securities and Exchange Commission, which is considering more regulation of hedge funds, has seen a “steep increase” in fraud cases in the $600-billion investing sector, SEC Enforcement Director Stephen Cutler said Thursday.

The commission brought 12 cases against hedge funds in 2002 compared with seven in 2001, six in 2000 and two in 1999, Cutler said at an SEC-sponsored round table convened to examine whether the private investment partnerships need to disclose more information to investors.

“In the enforcement arena, particularly in the cases that we’ve brought, what we have seen is rather basic blatant fraud,” Cutler said on the second of two days of hearings on hedge funds and their investment strategies.

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The SEC staff has conducted a yearlong investigation of hedge funds, whose numbers have more than doubled over the last five years.

Patrick McCarty, general counsel of the Commodity Futures Trading Commission, said at the round table that he didn’t think the number of hedge fund enforcement actions justified a regulatory crackdown.

“The amount of fraud cases that we have seen and I guess the SEC has seen does not seem to be sufficient to indicate the need for a huge sea change here,” McCarty said.

At the end of the hearings, SEC Chairman William H. Donaldson told the agency’s staff to begin writing a report with recommendations “for any actions that should be taken, whether legislative or regulatory, to insure that the hedge fund investors are adequately protected.”

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