20061016 Hedge Funds Draw Insider Scrutiny

Hedge Funds Draw Insider Scrutiny

October 16, 2006

For my financial-geek colleagues out there who share my passion for economics and the financial markets; the e-mail I received earlier today from the New York Times “DealBook,” edited by Andrew Ross Sorkin, (For tips, feedback: e-mail dealbook@nytimes.com; Subscriptions: http://www.nytimes.com/dealbook) called attention to an article in the New York Times today By Jenny Anderson: “As Lenders With Easy Access, Hedge Funds Draw Insider Scrutiny.”

Mr. Sorkin introduces the piece by saying: “Hedge funds have crashed the once-clubby world of corporate lending in a big way, and the increased presence of these lightly regulated funds is raising some concerns, especially as relates to the use of inside information. In at least one case, regulators are taking note. The Securities and Exchange Commission is looking into whether hedge funds who were lenders to Movie Gallery took their inside knowledge of the company's recent struggles and traded on it.”

She begins the article by saying:

“In early March, executives from Movie Gallery, a big movie rental chain, held a private conference call for their lenders to talk about how disastrous 2005 had been for the company. A string of Hollywood flops had kept customers away. More people were recording movies from television instead of renting them from a store. The executives said they needed more time to fix the problems, which included more than $1 billion in debt.

Most of the roughly 200 lenders were not bankers, but hedge funds. And what they heard was supposed to be confidential: it was inside information, as valuable to investors as a tip about an imminent takeover.

During the next two days, though, Movie Gallery’s shares were heavily traded, and its stock plummeted 25 percent.

A coincidence? Regulators are not so sure. The Securities and Exchange Commission is now looking into whether any of the hedge funds on the private call with Movie Gallery took their inside knowledge of the company’s struggles and traded on it. Movie Gallery announced earnings results to the public nearly two weeks after the private conference call.”

You can read the rest of the article here. The more you read, the more its gets curiouser and curiouser.

Kevin Dayhoff writes from Westminster Maryland USA. E-mail him at: kdayhoff@carr.org www.thetentacle.com Westminster Eagle Opinion and Winchester Report www.thewestminstereagle.com www.kevindayhoff.com has moved to http://kevindayhoff.blogspot.com/