Simply requiring hedge funds to register as investment advisers with securities regulators is not enough.
Galleon Management, a hedge fund at the center of a major insider trading case, is a case in point. Registration with the Securities and Exchange Commission failed to prevent what federal prosecutors contend was illegal insider trading by the fund's co-founder.
And, as details emerge about other figures in the case, registration apparently didn't prod the fund into aggressively vetting its top traders.
Congress is now considering a bill to regulate the $1.4 trillion hedge fund industry. Any bill should also require registered funds to provide securities regulators with a list of outside investment partnerships to which their traders or portfolio managers are party.
That way, the SEC and other regulators can better keep tabs of any hedge fund trader who may be tempted to cross the line to get an edge for himself or his fund.
Galleon has been registered with the SEC since November 2005. Several months earlier, Ali Far, a former top tech portfolio manager for Galleon and one of the cooperating witnesses in the insider trading case against Galleon co-founder Raj Rajaratnam, formed a handful of private companies in Texas.
It's not clear what Far used the companies for, but they appear to have been intended as investment vehicles with names like Ormuzd Ventures LP, Zurathustra Ventures LP and Persepolis Ventures LP.
Todd Amacher, the Texas lawyer who created the companies for Far in August 2004, didn't return several phone calls or emails seeking comment. Amacher is a managing director with Robertson Griege & Thoele, a Dallas-based registered investment adviser that has developed a niche business in advising several former and current National Football League players.
According to Robertson Griege's website, Amacher joined the firm in February 2004. Since then, he has formed partnerships in Texas for Far and at least two other hedge fund traders. One of them is former Needham & Co technology analyst Anton Wahlman, who would later work for Spherix Capital -- the San Jose, California hedge fund Far started in 2007 after leaving Galleon.
There's no indication that Amacher had any dealings with Far or any other hedge fund trader beyond setting up the partnerships. A spokesman for Robertson Griege says that neither Far, Wahlman nor any other hedge fund trader Amacher may have done work for are clients of the firm. Robertson Griege has no connection whatsoever to Galleon, the spokesman said.
Amacher maintained a separate law practice specializing in estate planning work for a time after joining the investment management firm, the spokesman said, adding that Amacher no longer actively practices law.
A person close to Galleon insists the hedge fund wasn't aware of Far's outside partnerships. And this person insists that if Galleon had known of them, Rajaratnam and other top managers would have probably instructed Far to shut them down.
Assuming that's all true, a measure requiring hedge fund traders to affirmatively disclose whether they have any outside financial partnerships would put some teeth into the compliance checks that big hedge funds say they regularly do. If nothing else, it would give regulators some power to sanction hedge fund traders trying to keep secrets from their bosses.
It works much that way for Wall Street brokers and analysts, who are required to notify their firms of any outside financial partnership. The firms then report that information to the Financial Industry Regulatory Authority, which includes the information on a broker's publicly available registration statement.
That was the case with Wahlman, who joined Spherix sometime in 2008. He had to disclose the two investment partnerships Amacher helped set up for him because the entity was created while he still worked at Needham. If Wahlman had formed that partnership after joining Spherix, there'd be no formal requirement for him to disclose that information.
That's not right. It's time to start holding hedge fund traders to the same disclosure standards as the rest of Wall Street.