Regulators co-operate to counter fraud epidemic

By Sniffer

January, 06:- US and European regulators are intensifying their co-operation in investigating an epidemic of hedge fund and other major financial frauds.

The US Securities Exchange Commission has entered into over 30 formal information sharing arrangements with foreign counterparts. In May 2000, the SEC, together with the U.S. Commodity Futures Trading Commission (CFTC), signed a Memorandum of Understanding with the Monetary Authority of Singapore.

In the past year there have been a plethora of hedge fund frauds, with the major ones totalling around $2.5 billion (see table). They range from Refco, Bayou and Wood River in the US to Phoenix in Germany. Bankers, fund managers and regulators remark that the extent of the fraudsters’ greed has been mind boggling. They involve rigged performance figures, claims of profits instead of large losses, false auditors or lax auditing and controls and theft (see table below of the largest frauds).

In court documents and memoranda supplied by the liquidator of a failed hedge fund company, Philadelphia Alternative Asset Management (PAAM), the alleged fraud has similarities to the fraudulent techniques of Nick Leeson who brought down Barings Bank ten years ago. The CFTC and Liquidator are investigating PAAM manager Paul Eustace’s relationship with Thomas Gilmartin, a New York-based senior vice-president at Man Financial, which is acquiring parts of Refco’s derivative unit, including the Singapore branch. The alleged PAAM fraud relates to losses of $175 million hidden in an account that was not disclosed to investors. Profits were allegedly disclosed in one account, while losses were transferred to another account without the knowledge of investors. Man Financial has placed Gilmartin, who is allegedly a stakeholder of the hedge fund, on administrative leave. It is conducting its own investigation in co-operation with the CFTC.

In evidence to the UK Commons Treasury Select Committee, last week, Sir Callum McCarthy, chairman of the UK Financial Services Authority (FSA), the British regulator, said that hedge fund managers and investment banks faced a "pincer movement" from British and US regulators if they fail to improve the way they manage their affairs and dealing.

In a recent speech in London, SEC Commissioner Roel C. Campos emphasized that he was concerned about the "complex new products, intricate trading strategies and inventive capital raising techniques, not to mention a freer flow of fraud." The task at hand for US, European and other international regulators "is to co-operate and develop "high quality and consistent regulatory requirements to govern our markets and address the inherent risks", he said.

"A subset of investor confidence in the marketplace is investor confidence in the regulatory regime, " said Mr Campos, adding that he was concerned about "a constantly morphing, opaque… trillion dollar (hedge fund) industry".

In a recent speech in Switzerland, Sharon Brown-Hruska, Commissioner US Commodity Futures Trading Commission said that international regulators intended to enhance transparency and the clarity of regulatory requirements. In this way market professionals and end-users located outside a national jurisdiction will be able to understand the types of conduct that may require registration, licensing or authorisation.

Large Frauds and Suits in the Courts this year

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