By Neil Wilson
Last October the Securities and Exchange Commission caused a
sensation when it unveiled its wide-ranging insider dealing
probe into Raj Rajaratnam and the Galleon hedge fund group.
Notwithstanding some glaring omissions over the
years—such as, most embarrassingly, its failure to lay
a glove on Bernie Madoff—the Galleon case, with its
Hollywood thriller-style use of wiretap evidence, can only have
enhanced the SEC's reputation as a get-tough, no-nonsense
More recently, in the U.K.—after the United States
still the second biggest center for hedge
funds—the Financial Services Authority has also made a
high-profile move against an alleged insider dealing ring. In
late March it revealed that it was taking action against seven
individuals from various companies in London.
Unlike Rajaratnam, none of them was actually a hedge fund
manager. Although those charged included Julian Rifat, a
well-known execution trader at Moore Capital Management's
London operation, Moore was quick to point out that the charges
had nothing to do with its funds and that it was cooperating
fully with the investigation.
As with the SEC case against Galleon, the FSA move came with
a spate of publicity, ensuring that the FSA was also seen as an
agency taking serious action. After the initial surprise,
however, many in London were underwhelmed. As one prime broker
told me, "If they deployed more than 200 agents, you would have
expected them to catch some bigger fish—like one of
the big equity managers—not just people mainly from
the sell side."
Insider trading is, of course, a notoriously difficult thing
to prove. But the FSA had been warning for some time that it
was stepping up its investigatory activities and hinting that
some high-profile action would be taken.
Nevertheless, the agency does unfortunately seem to have got
itself into a position where it can't really win, whatever it
does at the current time.
Over the past decade, as the hedge fund industry grew in
London, the FSA was widely hailed as a light-touch regulator,
with appropriate, not invasive, regulatory requirements. Until
the credit crisis, at least, its approach appeared to have been
vindicated, with the hedge fund industry growing strongly but
remarkably scandal free compared with the United States, where
there was a regular pipeline of frauds, blowups and other
Some cynics may see this as evidence that the FSA was not so
much a light-touch as a soft-touch regulator. But in the U.K.
there have been few scandals, and most have involved firms with
non-U.K. origins and connections, such as the implosion of
Absolute Capital Management, which was set up initially in
Mallorca, Spain, by the German manager Florian Homm. The cases
of Weavering Capital, headed by former Swedish prop trader
Magnus Peterson, and Dynamic Decisions Capital Management,
headed by Italian professor Alberto Micalizzi, are two
But overall the U.K. regulatory scheme for hedge funds seems
to have worked pretty well: It requires registration for all
managers, even those managing only offshore funds, with a "fit
and proper person" test barring those with criminal records,
backed up by independent administration.
The problem for the FSA is not really hedge funds. It has
been the ongoing controversy surrounding regulation of the
banks. This goes back to the decision in 1997 of
then-Chancellor Gordon Brown to hand over authority for setting
interest rates to the Bank of England.
At the time, partly to avoid concentrating too much power at
the Bank, Brown took away its supervisory authority over banks
and handed it to the FSA.
After the financial crisis the FSA was attacked for not
having been up to the joof regulating the banks, with the
opposition Conservative Party, leading in the polls ahead of
the U.K. general election in May, now proposing to hand that
power back to the Bank of England.
Some in the hedge fund industry agree with this line of
thinking, including one who told me recently: "The FSA is,
unfortunately, a busted flush. What it's doing here is a case
of too little, too late."
This critic of the agency viewed the FSA's recent action on
insider trading as a last-ditch move to try to save its own
role in the system.
But there are probably many more in the industry who would
regard the diminution of the FSA with dismay, especially when
hedge funds are fighting the threat of new restrictions from
the European Union. AR