Spitzer Denies Ill Intent Towards Hedge Funds

by Carla Johnson, Investors Offshore, London

05 March 2003

Although New York's new 'Untouchables' hero, Attorney-General Elliot Spitzer, said last week that he was investigating a group of hedge fund managers suspected of 'pump-and-dump' style stock manipulation, he told the Wall Street Hedge Fund Forum in New York on Monday that he was not aiming to launch a general attack on the beleaguered sector.

To the enormous relief of the assembled hedge fund luminaries, he said that the industry did not merit wholesale change, unlike the investment banking sector: "By and large the problems with investment banking were structural," he said. "Hedge funds do not demand structural change."

However, the Attorney-General wasn't giving hedge funds a completely clean bill of health, saying that over-leverage, stock manipulation and lack of investor experience were all problems requiring attention. But he seemed unconcerned by short-selling, another practice currently under attack by regulators: "I am not saying anything critical of short selling," he said. "It has nearly always been an aspect of our marketplace that has been useful and beneficial. The people who first highlighted the problems at Enron were short sellers. Those under the microscope want to redirect attention away from themselves."

The NASD announced Monday that investors had filed a record number of complaints seeking damages from Wall Street firms in 2002 - 11% higher than in 2001 and 39% higher than 2000. Claims against mutual funds doubled, whilst complaints about broker investment recommendations to clients had jumped 73%.

Meanwhile, in another part of the hedge 'forest', 'HedgeWorld' reported last Friday that Park South Securities had collapsed as a result of a hedge fund fraud case, according to the Securities Investor Protection Corporation. The SIPC assists investors at bankrupt brokerage houses and is authorised by Congress. On Feb. 5, Stone House Capital Partners LP, a purported hedge fund, became the centre of the Park South fraud case, involving the alleged misappropriation of funds in certain brokerage accounts.

The Securities and Exchange Commission says that Todd M. Eberhard of Eberhard Securities diverted US$9.7 million out of brokerage accounts to Stone House, which Mr. Eberhard claimed was an unaffiliated San Francisco-based hedge fund that held US$1.6 billion in existing customer funds. In truth, according to the SEC, Stone House operated out of Park South's offices in Melville, NY, and had US$1.75 million in two accounts with Banc of America Securities, . One of the Bank of America accounts was a contribution account, while the other was a prime brokerage account with assets being first deposited in December 2002.

Recommended