Investigation into "Emerging Threat" of Hedge Funds

The head of the Bush administration’s task force on corporate crime is taking a strong stance on hedge fund regulation and investigation. Deputy Attorney General Paul McNulty said the potential for fraud in the $1.2 trillion hedge-fund industry poses an “emerging threat”

McNulty said “Wrongdoing in the lightly regulated investment pools makes them ripe for scrutiny by prosecutors, regulators and investigators. The corporate-fraud task force is also studying the scandal involving backdating stock options for executives”

Hedge fund and stock options issues have become part of the Bush administration task force agenda, they will discuss hedge-fund fraud at its next meeting at the end of this month, McNulty said. “There’s been some interest in the media recently on hedge funds, and that would be a good example of an emerging threat that we would want to talk about and ensure that we are handling,”

Last month, a federal appeals court in Washington threw out SEC rules requiring hedge funds to register with the agency and undergo inspections of their books and records. But McNulty said critics who say his unit should be shut down are wrong. “The corporate fraud task force is alive and well,” McNulty said. “The need for it in our view is still very clear and strong.”

A federal judge last month ruled that the attorney-fee tactic violated the rights of former KPMG LLP executives being tried on charges of selling illegal tax shelters. McNulty said he disagreed with the ruling. “As of today, that is the policy of the department and it will remain that way until we reach a decision that it should change in some way….We think the message has gotten out loud and clear, but that doesn’t mean we shouldn’t keep watching,” he said. “This ultimately is an environment that is enticing to those who are subject to excessive greed.’‘

Along with McNulty, the task force has or will soon have several recent additions, including incoming Treasury Secretary Henry Paulson, SEC Chairman Christopher Cox and Reuben Jeffery, chairman of the Commodity Futures Trading Commission. The group crafts policies on pursuing corporate crime and coordinates investigations.

When the task force identifies an emerging threat, it usually will consider whether more regulation is needed and whether agencies investigating wrongdoing are properly coordinating their efforts and using their resources.

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