By Lee Conrad

The Securities & Exchange Commission is attempting to shine a spotlight on the most opaque of investments-hedge funds-by creating a working group in its enforcement division to combat insider trading. It will be a liaison with other federal law-enforcement agencies and self-regulatory organizations.

In recent testimony before Congress, SEC Chairman Christopher Cox cited a case filed in March against several hedge funds and their portfolio managers, which he characterized as one of the most pervasive insider rings "since the days of Ivan Boesky and Dennis Levine." Another recent case featured a pharmaceutical executive and his three sons in a multimillion-dollar insider-trading scheme, Cox testified. The father regularly tipped his sons to confidential information from his employer and the family "created a purported hedge fund to conduct trading and further obscure their identities."

The new SEC group should be welcome news to many in the market. About 60 percent of private economists say hedge funds should be more strictly regulated, according to a recent WSJ.com survey, which appeared only a few weeks after hedge-fund Amaranth Advisors lost $5 billion in one week on its natural-gas investments. Fallout from the subprime mortgage market is causing more pain. Two Bear Stearns hedge funds connected to that market filed for bankruptcy protection on August 1 after losing more than 90 percent of their value.

Lack of transparency fosters an environment where investors take a back seat and are not allowed access to information about the funds' workings, says lawyer Jacob Zamansky, who filed suit against one of the Bear funds Aug. 1 on behalf of an individual investor. He says he plans to file dozens more for both institutional and individual investors in the next few weeks. Powerful institutional investors, which he acknowledges often don't get the public's sympathy vote, deserve accurate information about their investments, too, he says.

Others in the industry aligned with the funds, however, say the SEC is more interested in appearing like a diligent regulator. The SEC's new working group comes on the heels of another rule passed in June. It prohibits investment advisors to pooled investment vehicles-hedge funds, mutual funds and private-equity funds-from making misleading statements to investors.

Scott Meyers, chairman of the litigation practice group at law firm Levenfeld Pearlstein, which represents hedge funds, says the SEC's new unit will be busy looking to make "a big splash, to put ink in the paper." He expects to see more SEC investigations over the next year, both formal and informal, particularly since there hasn't been a major insider-trading scandal yet involving hedge funds.

If this is a political move on the SEC's behalf, it's a shrewd one, he notes. To be firmly against this action would be to cast oneself as favoring insider trading, he says. Indeed, Meyers says that whenever the SEC can publicly talk about insider trading, it automatically garners attention. "As long as [the agency] can attach insider trading to their concerns, they'll get the attention," he says. "[Hedge funds will] be a lot more circumspect on the perception of conflicts...because they'll be under more scrutiny."

These moves are the latest attempts by the SEC to bring more oversight to hedge funds. In early 2005, it tried to enact a rule requiring advisors to hedge funds with 14 or more investors to register. That was challenged in a court case, Goldstein vs. SEC, which the SEC lost in 2006. "There has always been a perception on the part of the SEC that hedge funds are some sort of black box... and that [they] need more scrutiny," Meyers says.