Hedge Fund Employees Think Their Competitors Are Cheating: Survey

Hedge Funds Think Other Hedge Funds Are Cheating
Rajat Gupta, center right, leaves federal court in New York, Wednesday, Oct. 24, 2012 after the former Goldman Sachs and Procter & Gamble Co. board member was sentenced Wednesday to 2 years in prison for feeding inside information about board dealings with a billionaire hedge fund owner who was his friend. At left is Gupta's attorney, Gary Naftalis. (AP Photo/Craig Ruttle)
Rajat Gupta, center right, leaves federal court in New York, Wednesday, Oct. 24, 2012 after the former Goldman Sachs and Procter & Gamble Co. board member was sentenced Wednesday to 2 years in prison for feeding inside information about board dealings with a billionaire hedge fund owner who was his friend. At left is Gupta's attorney, Gary Naftalis. (AP Photo/Craig Ruttle)

Most hedge funders will fan themselves angrily on their fainting couches, while dialing their lawyers, if you suggest they cheat to get ahead. At the same time, suspiciously large numbers of them think their peers aren't above such tactics.

Nearly half of the hedge-fund employees surveyed in a recent poll think their competitors are breaking the rules, via insider trading and other extralegal shenanigans. More than a third of the hedge-funders said they feel "pressured by their compensation or bonus plan to violate the law or engage in unethical conduct." And 30 percent said "they had personally observed or had first-hand knowledge of wrongdoing in the workplace," according to the plaintiffs' law firm Labaton Sucharow.

The survey, conducted for Labaton Sucharow, the Hedge Fund Association and Thomson Reuters' HedgeWorld, was first reported by the Wall Street Journal's Deal Journal.

It comes as one of the world's biggest and most successful hedge funds, SAC Capital, is under steady assault by prosecutors over insider trading allegations, recently paying a record $602 million to settle charges with the Securities and Exchange Commission -- while neither admitting nor denying wrongdoing, naturally.

SAC Capital's founder and namesake, Steven A. Cohen, has nevertheless been able to scrape up the cash to buy a $155 million Picasso and a $60 million Hamptons beachfront home. Cohen has not been accused of any wrongdoing, and he and his firm have consistently denied it. Still, when a hedge-fund giant under a cloud of suspicion can go out and roll like the Sun King, you can kind of see how lesser hedge-fund types might feel a need, maybe even an obligation, to bend the rules a bit to keep up with the Cohens.

The vast majority of hedge funders surveyed, 87 percent, said they would gladly report their co-workers to the SEC if they knew of wrongdoing. But 29 percent said they feared waking up with a horse's head in their bed, courtesy of top management, if they did so.

Depressingly, more than half of those surveyed -- 54 percent -- said they thought the SEC is "ineffective in detecting, investigating and prosecuting securities violations." The SEC does not prosecute criminal charges, however, and there the feds have been a bit more effective, at least in terms of raw numbers, charging more than 80 people and winning 72 convictions since 2009.

Hedge funders no likey all the attention, though: 34 percent said they thought regulatory and criminal crackdowns "will weaken the hedge fund industry."

And 13 percent said they would break the law "if they could make a guaranteed $10 million and get away with it," although something tells me that number is a bit low.

Lots of insider-trading experts have agreed that even big, splashy criminal cases like the SAC Capital crackdown and last year's conviction of former Goldman Sachs director Rajat Gupta have limited deterrent effect, noted Time's Sam Gustin recently.

"Realistically, 10 years from now, we’ll still be talking about the deterrent value of insider-trading investigations," Gustin wrote, "as unscrupulous Wall Street actors continue to seek advantage over others by just about any means necessary."

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