Overgrown Hedges

By Christopher Byron
New York Post
September 26, 2005

ONE of the first things any new chairman of the Securities and Exchange Commission does after getting the job is to clear his throat, put on his best "I mean business" scowl, and announce to the world just how tough he intends to be on the miscreants of Wall Street.

Normally, this harmless ritual lets the man taking on Washington's most thankless job preen a bit in public before getting smacked to the canvas by a system that basically doesn't want him to be tough at all.

But these are not normal times — and the one thing this country needs more than anything is a government that knows what it is doing and that deserves to be taken seriously by its citizens.

Nobody can possibly blame the president of the U.S. for the back-to-back hurricanes. But for Bush to make a big deal of rushing to Colorado Springs last week to "monitor" Hurricane Rita developments from the Pentagon's NORAD headquarters bunker seemed not much more than a presidential "feel your pain" stunt intended to improve his poll numbers.

Such ploys work best when the audience doesn't see the purpose behind them — and when the opposite happens it is hard to escape the sense of being on the receiving end of a con job.

Unfortunately, feelings of that sort were also part of the subtext to certain remarks last week by Bush's new SEC chairman, Christopher Cox, who told the Wall Street Journal just how tough he intends to be when it comes to pressing ahead with efforts to regulate the murky and crime-infested world of hedge funds.

Cox's predecessor, William Donaldson, made growling at the $1 trillion industry a priority pursuit after he took office in 2003. Yet Donaldson wound up resigning the chairmanship in defeat last June when he lost his base of support within the administration by pushing through regulations against the objections of not just two of his own SEC commissioners — but Federal Reserve Chairman Alan Greenspan himself.

So Cox certainly sounded macho when he vowed to implement the package of hedge funds rules and regulations "exactly as adopted" in February.

But Cox knew — or if he didn't, he will soon find out — that the SEC's regulatory powers have long since atrophied to the point that they no longer matter on Wall Street one way or the other. Obvious offenses are simply ignored until public outrage in the media reaches the boiling point.

Then, when cases are finally brought, they are left to languish for years in the Bleak House of the federal civil court system, at the end of which they are pleaded out and settled through so-called "consent decree" fines that are never collected.

All this and more now awaits Cox's efforts to continue in the footsteps of his predecessor and peek under the skirts of the hedge-fund industry. It means that for all practical purposes his efforts are going to amount to nothing but a waste of taxpayer money.

Outrageous behavior can be found just about anywhere one looks in the hedge-fund racket, and more abuses turn up every day. But simply documenting them is pointless if they are not stopped and the offenders are not punished.

Under longstanding federal law, responsibility for bringing criminal cases against white-collar lawbreakers has belonged to the federal prosecutors of the U.S. Department of Justice, who would normally receive referral cases from the enforcement division of the SEC.

But ever since 9/11, the Department of Justice has been focused on preventing a replay of that nightmare, and virtually all other work of has suffered.

It's hard to know by just how much the SEC's criminal referrals to DOJ have declined because the commission's most recent data are nearly three years out of date. But data from the federal General Accounting Office show FBI agents assigned to white-collar crime probes have declined by more than 20 percent since 9/11, which clearly shows DOJ's diminished appetite for white-collar prosecutions of any sort.

As a result, colossal, multimillion-dollar frauds in the hedge fund arena are already either languishing in the civil courts or being ignored entirely, leaving the perpetrators to face slap-on-the-wrist fines that they'll probably never even pay, instead of being sent to prison, which is what they deserve. Here are three such examples among many:

1.                   In Boston, an alleged con man named Treyton L. Thomas was charged with securities fraud by the SEC 14 months ago for orchestrating a penny stock pump-and-dump scheme in the spring of 2002. In the alleged swindle, the SEC says Thomas claimed to be the head of a $600 million offshore hedge fund called the Pembridge Group that was preparing to bid on a dodgy Canadian penny stock headed by an ex-FBI official named Oliver Revel.

In reality, there was no $600 million fund, and virtually everything else that Thomas claimed about himself and Pembridge was bogus. This clearly should have been a criminal case. Yet instead, the SEC filed a civil complaint against him, naming his sham hedge fund as co-defendant.

Since the hedge fund was a sham from the git-go, it failed to respond to the SEC's complaint, and two weeks ago was fined $550,000 in a "default judgment" that will never be collected. Meanwhile, the SEC has now agreed to turn the case against Thomas himself over to a mediator to settle.

2.         In Connecticut, a $1 billion hedge-fund operator named Scott Sacane used his fund, Durus Capital Management, to corner the market illegally — during spring 2003 — in a money-losing biotech penny stock called Aksys Ltd. This caused Aksys' stock price to soar, and boosted Durus' own performance numbers. SEC regulations say that purchases of that magnitude must be disclosed in public filings, and that failure to do so is a federal crime. But no charges, either criminal or civil, have ever been filed in the matter against either Durus or Sacane.

3.                   In July 2003, the SEC raided and shut down the Park Avenue offices of a crime-drenched hedge-fund operation called the Lancer Group. One of the group's top officials, Bruce Cowen, has since pleaded guilty to attempting to arrange a kickback with an undercover FBI informant, using one of the stocks in the Lancer portfolio, and is now in federal prison.

But Cowen's boss and the founder of the Lancer group — Michael Lauer — faces only civil charges for orchestrating a massive market-rigging scheme in which he used cohorts at the Bank of America, PricewaterhouseCoopers, and Citco Fund Services to inflate the value of worthless penny stocks in the Lancer portfolio to an aggregate value that at one point approached $1 billion.

For the past two and a half years Lauer has successfully fended off SEC attempts to obtain his company's books and records, and no trial date has yet been set in the case, whose docket sheet of pleadings, motions and whatnot already tops 100 pages. Neither the SEC nor the DOJ has made any attempts to pull Lauer's pals at PricewaterhouseCoopers, Citco Fund Services, or Bank of America, into the case, though their collective involvement in the swindle amounts to a kind of "Monarch Notes" summary of how these schemes operate.

With unfinished business like that on his plate already, it makes no more sense for the SEC's new chairman to huff and puff about pressing ahead with regulation of the hedge-fund industry than it does for the president to rush to Colorado to show that he feels the pain of people in Texas and Louisiana. Action and results are what people want now — not mere words and PR gestures.


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