During a congressional hearing in March, SEC enforcement chief Robert Khuzami announced a new initiative to go after financial ne’er-do-wells. “We’re now doing things like canvassing all hedge funds for aberrational performance,” he said, adding that the focus would be on “anybody who is beating market indexes by 3 percent and doing it on a steady basis.” As the law firm McDermott Will & Emery points out, however, it’s not clear whether policing any fund above that threshold will actually lead Khuzami’s Enforcement Division to potential misconduct, such as insider trading, improper valuation of investments, or manipulative trading. What if the real cheaters tend to beat the market by 5 percent and the SEC is squandering resources looking below that? Is Khuzami even sure the bad guys always beat the market?
The SEC’s enforcement division already has the three special investigative units that could potentially target hedge funds. When he came into his new title around the time Bernie Madoff was about to be sentenced, Khuzami said he wanted to change the agency’s habit on judging itself on “quantitative metrics” — i.e. going after small-time schemers rather than big fish because it meant an easy notch in your belt. We’re all for stopping the next Madoff before he Ponzis again, but maybe the best way to make up for underinvestigating isn’t to overcorrect.