As Fraud Investigations of Hedge Funds and Mutual Funds Proceed, Expect More Subpoenas, Lawsuits, and Proposals for Restrictions

September 18, 2003 Advisory

On September 3, 2003, the Office of the New York State Attorney General Eliot Spitzer announced a $40 million settlement with Canary Capital Partners, LLC (a multi-million dollar hedge fund), Canary Investment Management, LLC, Canary Capital Partners, Ltd, and the managing principal Edward Stern, for fraudulent trading of mutual-fund shares. Because of suggestions that such schemes are widespread, the news has triggered a flurry of media attention, and, more notably, significant regulatory inquiries and private class actions.

The media and regulatory buzz is not unlike attention to Spitzer's investigation of Wall Street research. That 2001 investigation led to sweeping industry-wide reform with ten Wall Street securities firms agreeing to pay $1.4 billion in fines in April 2002. The 2003 mutual-fund fraud investigations and lawsuits mark the beginning of yet another chapter in the ongoing scrutiny of investment practices.