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Third Point Management, a $5.6 billion New York hedge fund run by activist investor Daniel S. Loeb, confirmed it is under investigation by the Securities and Exchange Commission.
In a July 25 letter to investors, Loeb talks about the formal investigation by the SEC into its communications with other hedge funds. The investigation comes on the heels of an SEC audit of the fund last year when the firm registered with the agency. The examiners noted that the firm "regularly communicated with hedge funds about investment and trading ideas,'' according to the letter. "Such conversations permit us to test our hypotheses and refine our thinking and, as a result, we believe that participating in give-and-take with other managers is in the best interest of our investors,'' Loeb wrote in the letter. "Our outside counsel has examined this matter thoroughly and assured us that our position is consistent with the securities laws.'' The investigation comes at a time when the SEC is considering new rules to limit short selling and hedge funds are being scrutinized for their role in the cash crisis surrounding some of the nations most prominent financial institutions. The SEC reportedly wants to know if hedge funds knowingly and intentionally spread rumors about the financial strength of Bear Stearns before its collapse and contributed to the troubles at investment bank Lehman Brothers and federal mortgage guarantors Fannie Mae and Freddie Mac. Loeb points out, however, that short-sellers -- those who bet that certain stocks will go down -- can be effective in pointing out problems companies try to play down. "Secondly, a chorus of 'blame the shorts' is generally an excellent indicator of significant underlying problems and certainly has never heralded a commitment to undertake a serious and sometimes painful repair of weakened companies or underlying financial systems." The investor also said he is of the opinion that the proposed bailout of Fannie and Freddie "is fraught with moral hazard issues." As a friend said to me, "Capitalism without bankruptcy is like Christianity without hell." - Donna Block Categories Deal Video
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