The SEC's New Approach to Fraud

A new government system for spotting securities fraud is bearing fruit. Over the past month the Securities and Exchange Commission filed four fraud cases against three hedge funds and six people for misconduct, including improper use of assets, fraudulent valuations, and misrepresenting returns. “Hedge fund managers depend on valuation and performance for both their compensation and marketing,” says Bruce Karpati, co-chief of the SEC’s asset-management enforcement unit. “These managers have either manipulated performance or engaged in other falsehoods in order to line their own pockets at the expense of investors.”

The actions are a product of the agency’s initiative to build cases on data analysis instead of relying on tips. “We take a look at performance by comparing funds against their peers and then apply qualitative factors, including looking at experience, assets under management, their regulatory history, and whether they’ve been in trouble before,” Karpati says.