The federal jury that acquitted two Bear Stearns hedge-fund managers of securities fraud this week undermined the government's effort to find crimes in Wall Street's epic collapse. That's just half the story, though, and as far as investors are concerned, the less interesting half. Ralph Cioffi and Matthew Tannin, the men in charge of the two failed hedge funds, still face a lawsuit by the Securities and Exchange Commission. The SEC's filing demonstrates that agency's ability to pursue investment managers even when their funds are unregulated. It also shows what Congress should do to prevent investors from being victimized in the future.
A hedge fund collects money from wealthy individuals, pension funds and others with millions of dollars to invest and uses it to buy securities chosen by its manager. Unlike mutual funds, however, hedge funds aren't open to the public or required to register with the SEC. That means they don't have to disclose who's investing in them, where their money goes or how they're performing. Naturally, their investors expect to be kept informed, so funds typically provide audited information about their activities at least once a year. But those voluntary private disclosures aren't subject to regulators' real-time scrutiny.