Matthew Goldstein
In the increasingly lawless world of hedge funds, there are few cops.
The big Wall Street institutions that execute and process trades for hedge funds generally have no duty to stop -- or even be on the lookout for -- potential abuses, experts said. Securities regulators are also of little help, adopting a hands-off attitude to the supposedly sophisticated investors in these offshore funds for the rich and famous. The Securities and Exchange Commission usually gets involved long after damage to the investor is done, as was recently the case with Michael Lauer's Lancer Management Group and Beacon Hill Asset Management. The lax oversight of the $500 billion hedge fund industry is one reason few fault anyone but Scott Sacane for the bizarre trading activities of his $400 million Durus Capital Management hedge fund. Sacane has been under fire since disclosing two weeks ago that his Durus fund "inadvertently" acquired huge equity stakes in two small health care companies: Esperion Therapeutics(ESPR Quote - Cramer on ESPR - Stock Picks) and Aksys(AKSY Quote - Cramer on AKSY - Stock Picks). (Aksys sued Sacane over his trading Tuesday.) While it's too soon to say whether the out-of-control trading at Durus was the result of manipulation, incompetence or a combination of both, the episode should serve as another reminder that investing in a hedge fund requires a huge component of investor vigilance. Securities lawyers and other hedge fund managers said it's difficult to lay blame for Sacane's trading at the feet of either Goldman Sachs(GS Quote - Cramer on GS - Stock Picks) or UBS(UBS Quote - Cramer on UBS - Stock Picks), the two firms that served as Durus' prime brokers. Even though both firms processed trades for Durus and lent the fund money so it could buy stocks on margin, experts say it's generally not the responsibility of prime brokers to keep tabs on their customers' trading activities. "Generally they have no obligation," said Ron Geffner, a partner with Sadis & Goldberg, a New York firm that represents a number of hedge funds. "It ultimately comes down to the responsibility of the manager."
RSS
