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SEC Charges Multiple Hedge Fund Managers with Fraud in Inquiry Targeting Suspicious Investment Returns

On December 1, 2011, the U.S. Securities and Exchange Commission (the SEC) announced that it has brought enforcement actions against three advisory firms and six individuals for various types of misconduct including improper use of fund assets, fraudulent valuations, and misrepresenting fund returns. Notably, the SEC stated that these actions were part of an initiative to combat hedge fund fraud by identifying abnormal investment performance. Earlier this year, during congressional testimony, Robert Khuzami, the Director of the SECs Division of Enforcement (the Enforcement Division), faced questions regarding the SECs response to the Madoff scandal. During his testimony, Khuzami announced an investigative and enforcement initiative targeting hedge funds and their managers. He reported that the Enforcement Division is now focusing on hedge funds that outperform market indexes by 3% and [are] doing it on a steady basis. Khuzami referred to such performance as aberrational, and stated that the Enforcement Division is canvassing all hedge funds for such aberrational performance.

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