Distressed debt is big, big business. Of primary interest to the SEC is whether funds are accurately representing the size of their holdings in the distressed companies in order to gain access to sensitive, and potentially lucrative, data.

Via CFO.com:

Hedge Fund Bankruptcy Role Seen Probed

Stephen Taub
November 29, 2005
CFO.com

The Securities and Exchange Commission is investigating the increasing role played by hedge funds in bankruptcy proceedings and whether fund representatives are lying about the size of their stakes to gain critical, sensitive information, according to Bloomberg.

Hedge funds that specialize in investing in the securities of distressed companies often try to buy up a large portion of a senior class of bonds so as to gain a position on the creditors' committee of a company. That committee typically has a huge say in the company's ultimate restructuring and is privy to insider information.

The SEC is looking into whether fund representatives overstated their bond positions to gain membership on creditors' committees, according to Bloomberg. Hedge funds — loosely regulated private partnerships — are among the most aggressive investors in the paper of companies in financial distress.

"We're very actively interested in this area,'' Alistaire Bambach, chief bankruptcy counsel in the SEC's enforcement division, told the news services. "These official committees in bankruptcy cases get tremendous amounts of confidential information, and there's clearly a risk that they're not all trading cleanly and by the book."

The SEC has already brought an enforcement action against one hedge fund. Earlier this month, the commission accused Van Greenfield, who manages Blue River LLC, of fraudulently misrepresenting to the U.S. trustee overseeing the WorldCom bankruptcy case that Blue River owned $400 million in bonds in order to gain a seat on WorldCom's bankruptcy creditors' committee.

The SEC also asserted that Blue River failed to install written procedures to prevent the misuse of material, nonpublic information obtained by Greenfield, general securities principal of Blue River Capital, while he served as Blue River's representative on the bankruptcy committees of WorldCom, Adelphia Communications Corp., and Globalstar LP...

Check out CFO.com for the full story.

-- MDT

Labels: insider trading