This article was originally published 30 September, 2008

In the wake of the growing turmoil and uncertainty in the financial markets, the Securities and Exchange Commission (the "SEC") and other regulators are being more vigilant and aggressive in conducting investigations and examinations of hedge fund advisers. For example, on September 17, SEC Chairman Christopher Cox stated: "Director Thomsen and the Division of Enforcement will . . . expand their ongoing investigations by undertaking a series of additional enforcement measures against market manipulation. The Enforcement Division will obtain disclosure from significant hedge funds and other institutional traders of their past trading positions in specific securities. Those institutions will also be required immediately to secure all of their communication records in anticipation of subpoenas for these records." SEC Director of Enforcement Linda Thomsen added, "We are committed to using every weapon in our arsenal to combat market manipulation that threatens investors and capital markets." The SEC staff is particularly focused on whether market participants have intentionally spread false rumors about particular financial institutions and engaged in improper short-selling. The SEC is using a rarely-employed tool in its investigative arsenal — the requirement of a written statement under oath pursuant to Section 21(a) of the Securities Exchange Act of 1934. On September 19, the SEC announced:

The Securities and Exchange Commission today announced a sweeping expansion of its ongoing investigation into possible market manipulation in the securities of certain financial institutions. The expanded investigation will include obtaining statements under oath from market participants.

Hedge fund managers, broker-dealers, and institutional investors with significant trading activity in financial issuers or positions in credit default swaps will be required, under oath, to disclose those positions to the Commission and provide certain other information.

The Commission also approved a formal order of investigation that will allow SEC enforcement staff to obtain additional documents and testimony by subpoena. Investigators from NYSE Regulation and FINRA will be conducting a separate, parallel inquiry in coordination with the SEC by making on-site visits to various broker-dealers to address concerns about recent short selling activity.

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