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Many at hedge funds still feel pressure to break rules, survey finds

April 04, 2013|By Andrew Tangel
  • This photo shows the Wall Street sign near the front of the New York Stock Exchange.
This photo shows the Wall Street sign near the front of the New York Stock… (STAN HONDA / AFP/Getty Images )

NEW YORK -- Despite the federal government's crackdown on insider trading on Wall Street, many who work at hedge funds still feel pressure to break the law or compromise their ethics, according to a new survey.

The survey -- commissioned by an industry group, publication and law firm -- found that 35% of respondents said they felt pressure by their compensation plan to break the rules. A quarter of respondents cited other pressures.

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More than a quarter -- 28% -- said their funds' leaders would not likely contact law enforcement or regulators if they found out a top performer engaged in insider trading. And 13% said their bosses would likely ignore the problem. 

Lara Block, executive director of the Hedge Fund Assn., said some of the survey's findings were "troubling."

But she said in a statement that the association's members "have a deep commitment to corporate integrity," and that the survey "will help the industry to further strengthen its investor protection programs and root out any bad actors."

Half a decade ago, the FBI launched "Operation Perfect Hedge," leading to waves of arrests as corporate and Wall Street insiders, many from major firms, found themselves snagged in a sweeping investigation of illicit information sharing. Federal agents used wiretaps -- a tool previously reserved for cases involving mobsters or drug dealers.

Federal prosecutors in Manhattan have won 71 convictions in the resulting cases since August 2009, mostly through guilty pleas; none of the defendants have beaten the charges.

Still, the survey's results suggest that the government's efforts have yet to deter all bad behavior at hedge funds.

Nearly a third of survey respondents -- 30% -- said they had "personally observed or had first-hand knowledge of wrongdoing in the workplace."

But even more hedge fund insiders -- 46% -- said they think that their competitors "likely have engaged in unethical or illegal activity" to succeed. 

The online survey included 127 respondents from the hedge fund industry. In addition to the Hedge Fund Assn, the New York law firm Labaton Sucharow and the trade publication HedgeWorld commissioned the survey.

Respondents did not give high marks to the Securities and Exchange Commission, which along with the Justice Department has been bringing the insider-trading cases.

Asked about the SEC's ability to detect, investigate and prosecute securities violations, 54% said they perceived the agency to be ineffective.

The survey was conducted from Feb. 25 until March 17, a couple of days after the SEC announced its largest-ever insider-trading settlement.

CR Intrinsic Investors, a unit of the hedge fund SAC Capital Advisors, agreed to pay more than $600 million to settle the case. The settlement did not contain an admission of wrongdoing.

In announcing that deal, George Canellos, the SEC’s acting director of enforcement, seemed to suggest that the agency’s efforts may not result in lasting change on Wall Street.

"Insider trading has been a significant issue," Canellos said in a call with reporters. "It remains a significant issue, and it should remain a significant focus of our enforcement efforts."

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