Tuesday, January 5, 2010

The SEC shouldn't investigate hedge fund frauds

In this story we get a taste of the new vigor instilled in the SEC's enforcement division. This is mis-directed effort.

Every investor in a hedge fund makes it in one of two ways:
  • "I am a smart and/or rich person who is qualified on his/her own knowledge to make an investment without the usual protections of public offerings", otherwise called using 3(c)1 or 3(c)7 exemptions,
  • "I invest in an offshore company to skirt the laws, protections and taxes of the United States, and subject myself to the rules of a foreign nation", otherwise called investing in an offshore fund.
In the first case, these investors have chosen to avoid regulation.  Why should we dedicate limited SEC investigative resources to investors who have opted out?  They make their bed when they invest, let them sleep in it.  The SEC should be spending its time on protecting people who are playing in the system that's designed to be "safer".

By far, the majority of investors in hedge funds use offshore vehicles.  Managers prefer that.  Many times investors prefer that, and only go onshore when they have no alternative.  There's a whole industry of people providing mechanisms to "get offshore".  You cannot really separate investigations of onshore and offshore funds for a given manager.  They're too intertwined.  So, why should we worry about protecting investors who have not only opted out of SEC protections, they've opted out of the protections of the US legal system?  Heck, they don't even pay taxes to support the cost of the SEC!!

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