A recent survey of hedge fund professionals commissioned by the law firm Labaton Sucharow, HedgeWorld and the Hedge Fund Association, revealed some disappointing statistics regarding the prevalence of fraud and misconduct in the hedge fund industry. Among the more notable findings, about a third of the professionals surveyed (30%) have witnessed misconduct in the workplace; more than a third (35%) have been pressured to break the rules themselves; and almost half (46%) believe that their competitors engage in illegal activity. These results are somewhat in line with a study we previously wrote about which found that roughly 45 percent of employees in the general workforce observe fraud or misconduct each year.
The hedge fund survey also found that 87 percent of the respondents would report wrongdoing given the protections and incentives offered by the SEC Whistleblower Program. At the same time, however, a staggering percentage of the respondents (54%) believe the SEC is ineffective at detecting, investigating and prosecuting securities violations. What is more, a third of the respondents believe that the increased regulation and enforcement scrutiny will actually hurt the hedge fund industry. These competing statistics put a troubling spin on what is going on inside the hedge fund industry and whether the SEC is suffering from a perception problem that may undermine its recently-unleashed and highly-publicized whistleblower program.
If those who have knowledge of fraud or misconduct in the securities world do not trust the SEC to deal with it, they are much less likely to come forward and blow the whistle. This means that even if the SEC were not ineffective to begin with, industry insiders may perceive it that way and be reluctant to go to the agency with inside information. Time will tell as the SEC’s whistleblower program is still in its relative infancy. But the agency should at least be on guard that despite its rejuvenated enforcement approach since the whole Madoff fiasco, there remains a lingering sense that the SEC has a long way to go in gaining the trust, confidence and cooperation of the very constituents within its charge.
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