SEC, NYSE Have Threatening Words For Hedge Funds, Prime Brokers

Nov 13 2006 | 5:28pm ET

Hedge funds and prime brokers got a stern talking-to from regulators today, and a warning to clean up their acts—or else.

At a hedge fund conference in New York, Securities and Exchange Commission enforcement chief Linda Thomsen said the agency will ratchet up the pressure on illegal trading and abusing clients’ trust with a flurry of lawsuits. “I expect to see activity in connection with both,” she said. “These days, the money is in hedge funds, so the potential for securities law violations is there because there is so much money there.”

Meanwhile, the New York Stock Exchange’s lead enforcer took aim at hedge funds’ potential accomplices, the giant investment banks that serve as prime brokers.

Susan Merrill told conferees that the Big Board expects banks that are part of an underwriting syndicate for secondary stock offerings will detect hedge funds selling a stock short, with plans to cover the short sale with shares to be purchased in the secondary offering.

“We do expect member firms to put that information together,” Merrill said. “There will be actions related to that if that practice doesn’t get cleaned up.”


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