New York's Spitzer Investigates Hedge Fund Firms

by Glen Shapiro, LawAndTax-News.com, New York

27 February 2003

The financial sector's modern 'Untouchables' hero Eliot Spitzer, New York attorney-general is investigating a number of hedge fund operators, including Gotham Partners Management, the Aquamarine Fund, and Tilson Capital Partners. Spitzer thinks they may have conspired to manipulate the shares of certain securities, including MBIA, Federal Agricultural Mortgage (Farmer Mac) and Allied Capital.

It's known that the principals of Gotham, Aquamarine and Tilson attended business school together. Spitzer alleges that they jointly co-invested in short positions in MBIA and Farmer Mac, then used web sites such as The Motley Fool to 'talk down' the stocks. The target companies accuse the funds of colluding to drive down their stocks.

Jason Huemer, chief operating officer at York Capital, writing in the Financial Times, points out that the hedge funds admitted to having holdings in the stocks, but worries about Gotham's activities in Pre-Paid Legal Services, saying that: 'This begins to look like what regulators refer to as a "pump and dump", or talking up a company's shares in order to unload a position to unwitting buyers.'

Huemer also points out that the Internet is potentially a more dangerous channel than the traditional media used by funds for publicising their favourite stocks, or the reverse. 'But the internet, as managers are learning,' says Heumer, 'may be qualitatively different from traditional media and may require more stringent controls. Recognising the potential for abuse, the SEC five years ago formed the Office of Internet Enforcement to guard against the tide of "spammers" and chat-room scammers. More recently, the SEC posted a mock website at www.growth-venture.com as an educational illustration of the potential for hedge fund fraud over the internet.'

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