New York partner Marc Powers, head of the firm’s national Securities Litigation and Regulatory Enforcement Practice, and New York associate James Pfeffer co-authored an article for the December 2008 edition of Hedge Funds and Private Equity: Regulatory & Risk Management Update titled, “SEC Already Has Necessary Tools to Punish Hedge Fund Fraud.” According to Powers and Pfeffer, in the wake of the ongoing financial crisis, "a theme has emerged that we must vest our regulators with new powers, and more of them, to extend their bailiwick across the entire financial landscape. In particular, because they’re lightly regulated, hedge funds will be an easy target. This is dangerous for two reasons." The authors state that "the lightly-regulated hedge funds dabbled, but refused to join the ’clean plate club’ that has devoured the fetid mortgages . . . hedge funds that did not utilize any or excessive margin loans have been relatively healthier (though they have experienced large withdrawals)." Additionally, Powers and Pfeffer contend that "the Securities and Exchange Commission’s existing powers to combat fraud work" and that a recent case in Florida "demonstrated that when the issue is preventing securities fraud in hedge funds, the SEC already has overwhelming and decisive weapons in its arsenal." We should also ask, according to the authors, "if more aggressively regulating hedge funds would have solved some of this year’s major problems. Specifically, would it have really mattered in averting this financial crisis if the SEC had full inspection rights over these investment pools for the rich? Apparently, the SEC had full access to the books and records of various investment banking firms Bear Stearns and Lehman Brothers. But that did not prevent them from failing." Powers and Pfeffer’s article includes a summary of the history of hedge fund regulation and concludes: "The present turmoil in the U.S. and global marketplace will probably prompt a call for greater oversight and regulation of funds. This is understandable and, perhaps, needed. Because it is true, of course, that financial products, assets, tools, models and, indeed, hedge funds have all grown dizzyingly complex. But human nature has not. Fraud is still fraud, and it is still illegal, even if it is in a hedge fund . . . the SEC currently has the full panoply of powers to fight and punish fraudsters."
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