Hedge fund activist taunts SEC

Phillip Goldstein claims that restrictions on information are free-speech violation

Mar 3, 2008 @ 12:01 am

By Jeff Benjamin

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Open access to hedge fund information is at the heart of a brewing controversy that could result in a lawsuit being filed against the Securities and Exchange Commission as early as this week. Phillip Goldstein, who two years ago successfully sued the SEC to overturn a rule requiring hedge fund managers to register as investment advisers, is now charging that restricting access to hedge fund information is a violation of free speech. "I want to lay this issue to rest, and we want a universal solution," he said, citing a similar suit he has been waging for more than a year in Massachusetts courts. Mr. Goldstein, principal of Bulldog Investors LLC in Saddle Brook, N.J., gave the SEC an ultimatum: Either issue him a no-action re-sponse by last Friday, allowing him to open his hedge fund website to the public, or he would file suit and let the courts determine if the securities laws violate the First Amendment.

<b>Phillip Goldstein:</b>
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Phillip Goldstein: "You can't lose money if you can't make an investment, so what's the big deal?" (arnoldadler.com)

The issue boils down to an unsolicited request for hedge fund information through the Bulldog website in January 2007 by a Massachusetts resident who did not qualify under securities laws to receive such information because of insufficient net worth.

Mr. Goldstein, who claims he was set up in a sting operation in Massachusetts, was ultimately found not guilty of violating the solicitation rules regarding hedge funds.


But the whole experience has triggered a desire to eliminate what he describes as an illogical rule that prohibits providing information to individuals who can't legally invest.

"You can't lose money if you can't make an investment, so what's the big deal?" Mr. Goldstein said. "The only websites that require these kinds of pre-qualifications are hedge funds and porn sites, and I don't want to be lumped in with pornography."

For the SEC's part, Mr. Goldstein's Feb. 5 request for a no-action response didn't qualify as an urgent matter that would have the commission adjusting its normal 45- to 90-day consideration period.

"I told Mr. Goldstein it isn't likely we would be able to meet his unilaterally imposed deadline," said Douglas Scheidt, SEC's chief counsel in the division of investment management.

"When a person asks for no-action relief they usually don't tell us when we have to act," he added. "Mr. Goldstein said the issue is fairly urgent and important, and I'm sure it is very important to him."

Part of Mr. Goldstein's urgency relates to his appeal in Massachusetts for an official ruling on whether restricting access to hedge fund websites and other research to wealthy individuals and institutions is a violation of free speech.

Two weeks ago, he started seeking help from the media to make his case by offering the services of his legal team to help news organizations submit briefs in support of the First Amendment violation argument. A request to submit a brief was made to InvestmentNews. The newspaper is taking the request under advisement.

According to Mr. Goldstein, he has not yet secured any official support from news organizations, but he is in discussions with several.

Legal experts as well as representatives from the $1.3 trillion hedge fund industry are paying close attention to Mr. Goldstein's latest court battle with regulators.

"I think the hedge fund community will be watching this very closely, because I think most hedge funds would welcome fewer restrictions in the marketing area," said Mitchell Nichter, a San Francisco-based partner with the law firm of Paul Hastings Janofsky & Walker LLP in Los Angeles.

The Managed Funds Association in Washington, D.C., expressed support for greater access to hedge fund information on the grounds that it leads to greater transparency — something regulators long have promoted.

"We also agree with the general proposition that there is a meaningful distinction between providing information about a hedge fund generally and efforts to sell a fund's securities, and that SEC rules should focus on sales efforts," said Jack Gaine, an MFA special adviser.

The actual legal dispute has a number of potential stumbling blocks that could pit some regulatory exemptions afforded to private investments like hedge funds against the kind of open access and marketing allowed for more heavily regulated products like mutual funds.

"The registration exemption for private offerings comes with a prohibition of general advertising and solicitation," Mr. Nichter said. "This case certainly has an interesting flavor to it, and maybe it can precipitate a sea change in the way investments in this category are viewed."

Mr. Nichter added that there will be a unique challenge of applying a securities law written in 1933 to the modern age of Internet-based marketing and research.


On the free speech argument, it could come down to whether the hedge fund information is deemed political or commercial in nature, according to Michael Siebecker, assistant professor of law at the University of Florida's Levin College of Law in Gainesville, Fla.

"The pot of gold is getting something characterized as political speech, but if it is determined to be commercial speech that would be much more favorable to sustaining the regulations," Mr. Siebecker said. "The Supreme Court has never defined the difference between commercial and political speech, and the problem arises when you have an amalgam of political and commercial speech."

Another challenge facing Mr. Goldstein is the existence of two proposals currently being considered by the SEC to increase the net-worth requirements for hedge fund investors — which indirectly make a stronger case against greater access to information on private investments.

"There's a lot going on with regard to hedge funds right now and [the no-action request by Mr. Goldstein] is perhaps uncharted territory," said Mr. Scheidt of the SEC.

Regarding Mr. Goldstein's potential lawsuit against the SEC, Mr. Scheidt said the notion of being sued would not help expedite the commission's review process.

"It's not like he needs our permission to file a lawsuit against us; he is within his rights to do so," added Mr. Scheidt. "Just don't hold a loaded gun to my head, because I might just tell you to pull the trigger."

E-mail Jeff Benjamin at jbenjamin@investmentnews.com.


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