The Securities and Exchange Commission (SEC), which recently heightened its scrutiny of the hedge fund industry, is suing a New York hedge fund and its principal, alleging the fund made more than $1.48 million in profits from illegal trading.The lawsuit, filed in the U.S. District Court in Manhattan, claims that Colonial Investment and its Colonial Fund improperly used shares purchased in at least 18 registered offerings to cover short sales that occurred during the five business days before the pricing of those offerings.
The SEC claims Colonial violated a rule that prohibits covering of a short sale with securities purchased in a registered offering if the short sale occurred during a restricted period.
The regulator is also suing Cary G. Brody, the principal of Colonial Management, who directed, authorized and supervised trading of the securities.
Brody is alleged to have directly benefited from the transactions because he was an investor in the company and his compensation was based in part on its profits, the SEC said.
"Short sellers who violate the rule's prohibitions can profit unfairly because they largely avoid exposure to market risk by using shares purchased at a discount in a registered offering to cover restricted period short sales," the SEC said.
The SEC recently heightened its scrutiny of the hedge fund industry, probing executives for insider trading. The agency recently sent out a 27-page letter to registered advisers, asking them for information about relationships between managers, employees, family members and public companies.
The SEC intends to assess the risk that hedge fund managers may have access to non-public information. The regulator also wants to examine the controls that advisers have in place to prevent insider trading.
There are currently some 9,500 hedge funds with total assets of about $1.4 trillion. They are usually exempt from any direct regulation by the SEC, NASD and other regulatory bodies.
However, given the size of hedge fund assets and their substantial sway over markets, there is a continuing debate over whether further regulation is required.The Securities and Exchange Commission (SEC), which recently heightened its scrutiny of the hedge fund industry, is suing a New York hedge fund and its principal, alleging the fund made more than $1.48 million in profits from illegal trading. Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio