Subject: File No. S7-30-04
From: David Patch

July 24, 2004


I find it ironic that the split between Hedge Fund Registration within the Commission is split by party lines. The SEC is required by law to be fully represented by an equal distribution of parties but its Commissioners are supposed to be focused on Investor Protection and not party lines. Amazingly, it appears politics is a priority over Investor protection.

Should Hedge Funds be registered? Yes. Why? Because it is good for the safety off all who trade in the securities markets. Hedge Funds are not about their particular clients but about the securities these funds trade. Securities we all own. Recent allegations regarding Hedge Fund involvements in market timing is simply the tip of what I expect to be more allegations of fraud regarding Hedge Funds.

Senator Mike Enzi of the Senate Banking Committee made recent public statements where he, as a Republican, was opposed to Hedge Fund registration citing the needs of the SEC to focus on fighting the majority of fraud taking place in our markets. The Senator cited the small percentage of overall enforcement actions taken against Hedge Funds over those taken against Mutual Fund, IPO, and Research related crimes. Unfortunately, the Senator has forgotten the past. Something a member of the Senate Banking Committee should not be doing.

The SEC enforcement actions against our Wall Street firms was originated not by the SEC but by activities taken by the NY Attorney General. The enforcement actions by the SEC regarding Mutual funds was based on the actions taken by the NY and Massachusetts Attorney Generals after the SEC blew off a whistleblower from Putnam. These actions have only taken place because of massive fraud reported after the fact. Does the Senator wish to have a similar circumstance take place regarding hedge Funds? Can our economy afford more losses due to fraud? What about his, and his colleagues, promise to do a better job of forward looking?

Hedge Funds are a growing financial business in our markets. The impacts these funds have on the overall stability of our economy is huge. Recently, the SEC approved a short selling reform package, regulation SHO, to address the issues of abusive levels of settlement failures on the books of our Broker-Dealers. How are these failures attributed to Hedge Funds we do not know because the SEC does not disclose this information? Hedge Funds do use the practice of short selling as part of their arsenal and short selling is what creates settlement failures. Are Hedge Funds associated with the overselling of stocks to levels where, as the SEC claims, settlement failures exceed the entire public float of companies? We should certainly find out. Somebody is doing it through our markets and our Broker-Dealers.

In recent news reports the present markets are considered oversold. It is this overselling that is driving market capitalizations down and reducing our investment portfolios. That affects our liquidity of cash and our ability to boost the economy as investors. Are Hedge Funds creating this overselling for the personal gains of clients? These are the answers the SEC needs to know and understand. We already know that the Wall Street firms have defrauded the Investors by creating false analysis to boost stock prices, how do we know what Hedge Fund Managers will do to make similar profits for themselves and their limited client base? Greed is ceryainly the driving force of Wall Street.

Today the Securities markets have a confidence problem. Every major Wall Street firm has been accused of not 1, nor 2 securities violations but several. They did so for personal wealth and greed. The fact that our securities regulators missed these opportunities before we all suffered is a price Hedge Fund Managers must pay as the industry as a whole can no longer be trusted.

Offshore Hedge Funds have been accused of serious crimes against our Markets. Operation Bermuda Shorts implicated several offshore banks and Fund Managers with trying to manipulate our stocks. Thomas and Andreas Badian of Rhino Advisors have had an SEC civil complaint filed and now have a criminal complaint with the Department of Justice over short selling manipulation. These opportunities were created based on the ease in which short selling is used to manipulate our markets. Without accusing Hedge Funds of similar abuses, it is because of this evidence that their practices must also be carefully scrutinized.

Will Registering Fund Managers eliminate fraud? No, not by itself. But registering is the first step to addressing the potential opportunities of fraud to be apparent in the future. Registering may actually help the Hedge Fund industry as those potentially suspect managers may not open up shop and bring down the reputation of the legitimate managers. Registration is an ounce of protection in an industry now looked at as rigged against us all.

As for Senator Enzi and the Commissioners in dissent over Hedge Fund registration, I am appalled that you have yet to learn from past sins. The Senate Banking Committee and the SEC have yet to provide an ounce of prevention to those of us who have suffered at the hands of securities fraud. While public hearings are constantly being held to address the sins of the past and promises of preventing it in the future, we have yet to see legitimate change. Today, changes are being attempted BEFORE the crimes have overgrown our markets and you choose to publicly shoot down the efforts. The 9/11 Commission findings addresses a lack of Federal Agency cooperation and pro-active measures in preventing terrorist attacks. Similarly the Senate Banking Committee, House Financial Services, and Securities and Exchange Commission lack that same cooperation and pro-active thinking that is needed to protect our markets and our economy.

Our Markets are not about politics but about our nations investors and their financial future. At some point those in Washington should have the courage to put those people ahead of their political agendas. The ounce of protection by having Hedge Funds register far outweighs the cost of future scandals. Is the Senator and these Commissioners in dissent willing to take personal responsibility for the impacts if that scandal happens?

The Industry cannot be trusted as we see it today and Hedge Funds are the first to pay the price for failed Regulatory Agencies and Congressional Oversight Committees. When these agencies start taking responsibility for their positions the Industry could become less regulated. Until then, more is needed not less. Unlike the Congress our retirement portfolios are partially based on a Social Security system we pay into. Since we cant count on that money being there we cannot afford to lose all of our savings in a rigged and poorly regulated market. Congress is screwing up the Social Security system because they do not have to rely on it and presently Congress is helping screw up our securities markets because of their personal politics being put in front of the Investor protection.