Why the Hedge Fund Stretch?

On Friday August 18, the SEC announced that on August 7, the US Attorney for the District of Massachusetts charged a hedge fund advisor with thirteen counts of mail and wire fraud for his actions as the managing partner of Groundswell Partners LLC, the General Partner and management company of Groundswell Capital LP, a quantitative systematic hedge fund.  [U.S. v. Mark R. Conway, 06-CR-10236-PBS (D. Mass.)] (LR-19807) http://sec.gov/news/digest/2006/dig081806.txt  In 2005, the SEC brought an enforcement action against the same advisor based on allegations similar to those in the indictment. Litigation Release No. 19460 http://sec.gov/litigation/litreleases/lr19460.htm  What is noteworthy about this announcement is not the criminal or civil enforcement action.  These cases are just the most recent in a line of enforcement actions involving hedge funds.  Rather the more interesting question is why the SEC reached out – or perhaps overreached is a better term – to issue its hedge fund rules that became effective last February.  Those rules were struck down recently by the D.C. Circuit in Goldstein v. S.E.C., No. 04-1434 (June 23, 2006), prompting many funds to de-register or consider de-registering with the Commission.  Additionally, in response to an ABA request for a no-action letter, the SEC staff has been forced to clarify how the rules apply to funds that choose to remain registered and for those that elect to de-register.  http://www.sec.gov/divisions/investment/noaction/aba081006.pdf
Nevertheless, SEC Chairman Cox recently testified before congress that post Goldstein the Commission will continue to bring enforcement actions against hedge funds and hedge fund advisors who violate the antifraud, civil liability and other provisions of the federal securities laws. Indeed, the Chairman declared that “[h]edge funds are not, should not be, and will not be unregulated.” See Testimony Concerning the Regulation of Hedge Funds, Chairman Christopher Cox, July 25, 2006 http://www.sec.gov/news/testimony/2006/ts072506cc.htm  In view of the SEC’s past and current enforcement efforts why the hedge fund stretch last February? If the current provisions in the federal securities laws backed by a string of civil and criminal enforcement actions are not sufficient, surely the SEC knows how to approach Congress rather than take unauthorized regulatory action.