As reported on November 5 in Investment News, the brokerage industry weekly, litigation of hedge fund fraud cases is on the up tick, thanks to the surge in new hedge funds. Quoting Morningstar, Inc.’s director of hedge funds and alternative investments, the article reports there are currently around 10,000 to 12,000 hedge funds, over a five-fold increase since 2002, with assets of anywhere from $5 million to $10 million in small funds and over $1 billion in the mega hedge funds. Meanwhile, the hedge funds have managed to stay for the most part unregulated by the governmental authorities despite bills pending in Congress.

Coast to coast, investors are claiming wrongdoing connected with the hedge fund craze, including wrongful promotion and sales of the funds and improper trades made by the fund managers. Investment News cites recent cases against large funds or their principals, such as two Bear Stearns mortgage related funds and smaller funds like Vega Opportunity Fund and its management firm (Sample & Cross Capital Management in Illinois), and APEX Equity Options Fund, marketed in California. Over the last few years, Long Term Capital Management and Amaranth LLC were two of the more prominent large funds to implode.

Some of these hedge fund fraud cases are filed on behalf of investors in court, but others will likely be filed in arbitration at FINRA, now the only self-regulatory, industry-member organization left since the consolidation in summer 2007 of the regulatory and arbitration arms of the NYSE with that of the NASD. Choosing the forum in which to commence a case is usually based on a fact specific analysis best done by professionals. The hedge fund offering, the investments made by the hedge fund, the principals of the hedge fund, and the type of wrongful activity are some of the other factors for review. But for investors with hedge fund losses, recovery of damages down the winding arbitration road is not so clear in light of the NASD’s own records, which show that the percentage of recovery of even $1 dollar for investors was down to an all time low of 42 percent in 2006.

Ted Eppenstein’s review of government and independent studies of arbitration awards covering 20 years highlights the downward spiral of the public’s chances in securities arbitration, where many hedge fund claims will be filed. Ted’s proposals on what to do to remedy the situation for investors is contained in the testimony he gave on October 25, 2007 in his appearance before the U.S. Congress House Judiciary Committee, Subcommittee on Commercial and Administrative Law in support of H.R. 3010, the “Arbitration Fairness Act of 2007.”

Ted’s full Written Statement to Congress, urging the legislators to specifically include investors in the ambit of the Act’s protections, is available on the Subcommittee’s Web site and also on the Eppenstein and Eppenstein securities arbitration attorneys’ Web site (without exhibits). To date, Ted is the only attorney to appear before this Congress to recommend that investors be given back their Seventh Amendment right to go to court to adjudicate their grievances, and to propose the formation of an alternative independent arbitration forum outside the brokerage industry to settle such disputes.