June 27, 2006 > U.S. appeals court rejects SEC rule reining in hedge funds; Pequot denies improper trading
U.S. appeals court rejects SEC rule reining in hedge funds; Pequot denies improper trading
by Marcy Gordon
WASHINGTON (AP), Jun 23 - In a setback to the Securities and Exchange Commission, a federal appeals court on Friday overturned a rule bringing hedge funds under new supervision by the agency.
The decision by the U.S. Court of Appeals for the District of Columbia Circuit sent the rule _ which bitterly divided the five-member SEC when it was adopted in October 2004 - back to the agency to be reviewed.
Meanwhile, a major hedge fund that is under SEC investigation for possible insider trading denied that there was any improper activity by the fund. "The trades at issue were made in the ordinary course of the firm's business and were entirely normal within the context of its daily investing activities,'' said Jonathan Gasthalter, a spokesman for the hedge fund, Pequot Capital Management Inc.
The SEC rule for hedge funds, which are high-risk, largely unregulated and secretive investment pools, took effect on Feb. 1.
SEC Chairman Christopher Cox, responding to the court's ruling, said he had asked the agency staff to come up with several possible alternatives to the rule as written.
"The SEC will use the court's decision as a spur to improvement in both our rulemaking process and the effectiveness of our programs to protect investors, maintain fair and orderly markets, and promote capital formation,'' Cox said in a statement.
Hedge funds have traditionally been the investment domain of the wealthy but have become popular with smaller investors in recent years. Today some 7,000 hedge funds in the United States command an estimated $750 billion to $1 trillion in assets and leave a wide footprint in the financial markets, as they are believed to account for as much as 20 percent of all U.S. stock trading.
Regulators' concern about the funds' explosive growth and virtually unbridled operations prompted the SEC rule, which requires most hedge-fund managers to register with the agency. That opens the funds' books to SEC examiners.
But the appeals court, in its decision Friday, called the SEC rule "arbitrary.'' The agency failed to make a compelling case for the necessity of the rule, the court said.
It marked the second setback for the SEC within a few months from the appeals court. In April, the court rejected and sent back to the agency rules governing the mutual-fund industry, which mandate that chairmen of mutual funds be independent from the companies managing the funds.
Attorney General Richard Blumenthal of Connecticut, where many hedge funds are based, on Friday denounced the court's new ruling. It "leaves hedge funds in a regulatory black hole without any rules - even minimal disclosure - to protect consumers and assure industry integrity,'' he said.
The SEC investigation of Pequot Capital came to light in a report Friday by The New York Times that an SEC attorney who led the probe has told Congress he was blocked by superiors when he tried to question a prominent Wall Street executive. Senate investigators are examining the allegations by the attorney, Gary Aguirre, that his firing from his job by the SEC last September was related to his efforts to take testimony in the Pequot probe from John Mack, the chief executive of investment house Morgan Stanley Inc.
No charges have been brought against Pequot Capital, a hedge fund with some $6.5 billion in assets that is overseen by Arthur Samberg, a well-known money manager and philanthropist. The fund, based in Westport, Conn., also has offices in New York, California, Massachusetts and London, England.
SEC spokesman John Nester declined comment Friday. The agency has neither confirmed nor denied that the fund is under investigation.
Aguirre has told Senate investigators that Pequot's trading had triggered suspicion among stock-exchange officials, who made referrals to the SEC on 18 occasions. According to the Times story and material provided Friday to The Associated Press, Aguirre said that in one case in 2001, Pequot reaped $18 million by investing in companies that announced a big merger soon afterward.
"Nobody at Pequot was tipped by anyone regarding the ... acquisition or any other corporate event,'' Gasthalter, the spokesman for the fund, said in a statement. "In the period under review, Pequot conducted over 136,000 trades, and it is natural that some limited number would be kicked out by (stock exchange) market surveillance efforts. At all times, Pequot's securities trading has been entirely proper and not based on insider information.''
On the Net:
Securities and Exchange Commission: http://www.sec.gov
Court of Appeals for the District of Columbia Circuit: http://www.cadc.uscourts.gov/internet/internet.nsf
Pequot Capital Management Inc.: http://www.pequotcap.com