Authorities Trim the Hedge Funds; City FOCUS

Article excerpt

Byline: Lucy Farndon

ALREADY reeling from a crisis of confidence and poor investment returns, hedge funds face another major threat - in the form of the US authorities. Wall Street is abuzz with talk about the surprise arrest of Galleon Group's founder Raj Rajaratnam last Friday on insider dealing charges.

For many, it is hard to know what is more shocking - the allegation that Rajaratnam was working with a wide network of executives from highly respected firms or the extent of the secret monitoring and phone tapping undertaken by American investigators.

In what seems to be a step change in the determination to crack down on white-collar crime, it has emerged that federal investigators had spent two years probing Galleon and other firms, having secured permission from the courts to listen into phone conversations.

Last Friday's arrests are unlikely to be the last of it. While on this side of the pond, the Financial Services Authority has made little progress in cracking down on insider dealing - save for a few amateur crooks - the Rajaratnam arrest is said to be the first in a line of other 'significant' cases.

Experts are drawing parallels with the tough tactics used by the US authorities back in the 1980s, to nail Ivan Boesky, who made a fortune as an 'arbitrageur' betting on corporate takeovers.

He was jailed for using tips given by insiders and buying up shares shortly ahead of deals.

But his sentence was reduced after he helped build a case against junk bond financier Michael Milken.

Having been shamed over its failure to spot Bernard Madoff's [pounds sterling]65bn Ponzi fraud - whose victims included HSBC and Royal Bank of Scotland - the US Securities and Exchange Commission is desperate to crack other financial crimes.

Traditionally, hedge funds have managed to keep their heads down and avoid the same level of scrutiny seen at most publicly listed investment firms.

Although the industry has come under fire for being opaque, institutional investors have been happy to invest their cash and ask few questions, so long as the returns have made it worthwhile. Rockbottom interest rates in the wake of the financial crisis have made it all the more pressing for them to seek out higher returns.

Galleon had an impressive growth record. Set up in 1997 by Rajaratnam, it had assets of more than $7bn at its peak last year and was one of the world's largest hedge funds.

Rajaratnam managed the group's technology fund. It is in trying to inflate that fund's performance that he allegedly netted $20m in illegal profits between 2006 and 2009. …