Firms hurry to comply with SEC subpoenas
Dozens of hedge funds and broker-dealers are scrambling to send reams of e-mails and trading records to regulators probing suspected stock price manipulation, several sources at hedge funds said.
The Securities and Exchange Commission recently sent subpoenas to more than 50 firms concerning trading in investment banks Bear Stearns, which was rescued in March, and Lehman Brothers Holdings Inc., whose shares have been hurt badly by rumors about its financial health, said four sources, who have seen the documents but were not authorized to speak about them publicly.
Among those receiving subpoenas were investment bank Goldman Sachs Group Inc. and prominent hedge fund firms SAC Capital Advisors LLC and Citadel Investment Group.
Spokesmen for the two hedge funds declined to comment, and calls to Goldman Sachs were not immediately returned. SEC spokesman John Nester declined to comment about the investigation or discuss which hedge funds and banks received subpoenas.
At the same time, hedge fund managers are reacting to the SEC's emergency decision to limit short selling, which was revealed Tuesday, and to an announcement Sunday that regulators would immediately examine whether broker-dealers and investment advisers have controls in place to prevent market manipulation.
"This will likely have a chilling effect on short sellers," said Martin Sklar, who works with hedge funds as a partner at Kleinberg, Kaplan, Wolff & Cohen PC.
Washington's triple assault signals how politically charged the matter is at a time when corporate executives and politicians have been blaming speculators and short sellers, who bet a stock price will fall, for supposedly undermining financial stocks.
Hedge fund managers acknowledged that, even though the SEC often asks them for information, the agency rarely sends out subpoenas to this many firms all at once.
"This is a visible and high-profile investigation by the SEC, and there hasn't been anything this significant in terms of public importance since the market-timing scandal," which involved dozens of mutual funds and was uncovered in September 2003, said George Mazin, a partner at law firm Dechert LLP, which advises hedge funds.
Several prominent hedge fund managers, who asked not to be identified, called the probe into rumor mongering a "witch hunt" and a "fishing expedition," insisting they base their bets on meticulous research, not innuendo or rumor.
Still, even at firms where managers insist nothing illegal happened, compliance departments are working overtime to meet the government's requests.
Traditionally, the SEC will ask for correspondence - e-mail and instant messages, for starters - from specific dates and related to specific companies.
Most of the data have to be sent to the SEC in electronic form so government lawyers can search for keywords, several hedge fund lawyers said.
Phone conversations are more difficult to capture because loosely regulated hedge funds tend not to record their calls.
"They are not going to find anything at the big firms most likely, but they are probably trying to get information on the small guys who don't have big legal departments and compliance officers and who might be more tempted to play fast and loose," said one manager with a prominent firm who asked not to be identified because he was not authorized to speak publicly about the matter.
