Private equity firms industry gets ready for closer scrutiny by US regulators- report

December 1
6:52 PM 2013

A report from the Financial Times says that regulators in the US are now looking to the alternative investment industry after getting their share of legal victories against the hedge funds. Citing lawyers who work with the buyout industry, the report said private equity firms, in particular, are expecting a closer inquiry from authorities after The Securities and Exchange Commission won a USD 1.8 billion fine against SAC Capital this month on allegations of insider trading.

Lawyer Timothy Spangler who is a partner at Sidley Austin said that private equity investigations are at the same stage where hedge funds found themselves five years ago. Former SEC Securities Fraud Chief John Carney said there was growing inspection of the private equity industry because "fraud follows money." Carney now works at law firm BakerHostetler as the Co-Head of Corporate Investigations.

Carney also said that SEC Chair Mary Jo White has called on her former lieutenants who worked with her when she was the New York Southern District attorney. He said that they were comfortable with such aggressive tactics as using undercover agents, giving bounties to whistleblowers and other strategies to prove that a white-collar crime exists. He said, "[Private equity firms] recognise there is a new sheriff in town."

Spangler said that in the past five years, only a few private equity companies underwent prosecution. However, it won't be this way for long. In addition, he said techniques like informants, wiretapping and "witness flipping" were being used more by US prosecutors. Witness flipping is the strategy of getting junior employees of a firm into cooperative witnesses who would get senior staff to the probe.

Spangler added, "These tools were hallmarks of mafia investigations, and they have proven very effective in hedge fund investigations. There is no limit to how these investigations could be replicated across other areas of financial services."

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