New Survey Reveals Problems in the Hedge Fund Industry; Affirms Importance of the SEC Whistleblower Program

Earlier this month, we announced the results of a survey that we conducted in partnership with HedgeWorld and the Hedge Fund Association. The survey polled U.S. hedge fund professionals on the prevalence of misconduct in the workplace and the effectiveness of firm leadership and the government in curtailing and responding to securities violations.

The results revealed a twofold problem in the hedge fund industry. First, the survey indicated both that misconduct remains commonplace and that professionals are under pressure to break the rules. In fact, 30% of respondents reported that they had personally observed or had firsthand knowledge of wrongdoing in the workplace. An alarming 35% of those surveyed reported feeling pressured by their compensation or bonus plans to violate the law or engage in unethical conduct. For some (13%), unethical or illegal activity was viewed as a prerequisite to success.

We were particularly concerned that hedge fund professionals lacked faith in the ability of both firm leadership and the government to effectively curtail and respond to wrongdoing in the workplace. Significantly, 28% of respondents felt that if leaders of their firm learned that a top performer had engaged in insider trading, they would be unlikely to report the misconduct to law enforcement or regulatory authorities. An even higher percentage of respondents (29%) would fear retaliation if they were to report wrongdoing. With regard to regulatory authorities, a majority (54%) of respondents felt that the SEC is ineffective in detecting, investigating, and prosecuting securities violations.

Still, the survey provided signs of hope. A significant majority, 87% of hedge fund professionals surveyed, indicated that they would report wrongdoing given the protections and incentives such as those offered by the SEC Whistleblower Program and 83% were aware of the program. This is significantly higher than the figures we found when surveying the US & UK financial services industry last summer. So while the lack of faith in government and fund leadership – in the face of tremendous pressure to break the rules – should sound the alarm, we take some comfort that hedge fund professionals are more willing to break their silence and report possible securities violations.

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