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Hedge Fund Fraud and its Victims

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It is now no secret that some hedge funds, including the largest ones, engage in two distinct species of fraud. Each fraud is distinguishable because it has a different potential victim in the cross-hairs. One species victimizes the hedge funds’ own investors. It includes the use of devices to reallocate profits to preferred clients, misleading statements regarding the fund’s risk parameters, and the ultimate fraud—the operation of a Ponzi scheme. In essence, these frauds are all forms of investment fraud.

The second species of fraud has a broader class of potential victim: all market participants. These are random victims who have no connection to the hedge fund. Much like the victims of a sniper, they never knew what hit them. Here are a few examples:

  • Millions of mutual fund investors had no clue that hundreds of hedge funds were using late trading and market to siphon billions from their accounts each year.
  • Value investors buying into an attractively priced small cap were unaware it was being hammered via the naked shorting of an $8 billion hedge fund.
  • Institutional investors who sold XYZ stock did not know hedge funds, knowing of an imminent tender offer, had run up the stock price through insider trading.
  • A large mutual fund which consistently suffered a loss when it bought PIPE offerings was unaware hedge funds, tipped about the PIPE offerings, were shorting the stocks.
  • Institutions who bought CDOs were unaware that Wall Street banks, such as Goldman Sachs, had designed the products to fail per the formula from a hedge fund that made billions. 

These frauds are commonly referred to as market abuse. Curiously, the big Wall Street banks, such as Morgan Stanley and Lehman Brothers, did not complain about these practices until they found themselves in the crosshairs during the financial crisis in 2008.

Gary Aguirre has unique qualifications for representing individuals and institutions harmed by hedge fund fraud in all its forms. As a Senior Counsel with the SEC’s Division of Enforcement, Mr. Aguirre led one of the SEC’s largest investigations of a hedge fund for insider trading and market manipulation. In his June 2006 testimony before the Senate Judiciary Committee, Mr. Aguirre testified how lax SEC enforcement of securities laws against investment banks and hedge funds allows them to engage in “invisible fraud and manipulation” as they did in the years before the 1929 Crash. He later served as confidential consultant to one of the Senate committees who investigated the SEC mishandling of its investigation of Pequot Capital Management.

In its 108-page report, the Senate Finance and Judiciary Committees agreed with Mr. Aguirre regarding the SEC’s lax enforcement:

The investigation of Pequot Capital Management could have been an ideal opportunity for the SEC to develop expertise and visibility into the operations of a major hedge fund while deterring institutional insider trading and market manipulation through vigorous enforcement. Instead, the SEC squandered this opportunity through a series of missteps….

After Mr. Aguirre left the SEC, the agency closed its Pequot investigation. However, Mr. Aguirre’s investigation of the hedge fund continued. He eventually dug up the evidence to prove Pequot had engaged in insider trading and made news doing so. Forbes explains what happened: “After a scathing 2007 report by the Senate criticized the SEC’s handling of Aguirre’s Pequot investigation, and after Aguirre dredged up the smoking gun e-mails and passed them along to the Senate, the FBI and the SEC in late 2008, the SEC reopened the case in January 2009.” Pequot paid the SEC $28 million to settle the insider trading case uncovered by Mr. Aguirre. In addition to Mr. Aguirre’s unique experience investigating hedge fund fraud, he has a broad background in securities litigation and an unmatched record of success as a trial attorney (See Aguirre Bio). He has been interviewed about developments in hedge fund fraud on national and international radio and television. He speaks on the same subject at national and global conferences on securities regulation (See News & Events).


Mr. Aguirre primarily assists clients throughout California including San Diego, Santa Clara, San Francisco, Fresno, Sacramento, Los Angeles, Alameda, Kern and Orange Counties with investor and whistleblower claims involving banks, hedge funds, mutual funds, private equity funds, brokers, and other financial institutions. He focuses on claims arising out of market abuse (e.g., market manipulation, high frequency trading, insider trading, naked shorting), investment fraud, bribes to foreign officials under the Foreign Corrupt Practices Act (FCPA) and the filing of false claims under federal or California law (qui tam statutes). Mr. Aguirre may represent individuals and institutions pro hac vice (in a particular case) in most states, but must first obtain the approval of the forum court, which has been routinely granted in the past. He will also assist individuals from any state or country who seek an award from the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC) under their whistleblower incentive programs.



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