SEC investigates link between hedge fund and private equity

Strange... why is this a big deal? Isn't it already public knowledge that buyout firms often have a separate trading arm operating much likea hedge fund. PE firms are not as regulated as investment banks, so is it any surprise if they make more from hedge fund arm than the actual buyouts?

However that being said, hedging is an integral part of mitigating credit risks for the entire firm. Only thing is... for whom does it ultimately benefits?

SEC Investigating Insider Trading in Credit-Default Swaps
By David Scheer

June 22 (Bloomberg) -- The U.S. Securities and Exchange Commission is examining cases of suspected insider trading in credit-default swaps, expanding the scope of a crackdown on investors' illegal use of confidential information.

``There are investigations looking into that market,'' Walter Ricciardi, a deputy enforcement director at the SEC, said in an interview in New York today. It would be a ``mistake'' to assume U.S. regulators aren't pursuing a case, even if they've never done one like it before, he said.

Prices on credit-default swaps, which insure investors against bond defaults, have surged before leveraged buyouts in the past year, fueling speculation that illegal profiteers are turning to credit derivatives. Federal Reserve Chairman Ben S. Bernanke urged regulators last month to take action to prevent abuses in those markets from undermining investor confidence.

Ricciardi declined to say how long the SEC has been monitoring credit-default swaps and wouldn't identify anyone under investigation.
``Insider trading, in particular in that space, is a priority for us,'' SEC Chairman Christopher Cox said in an interview June 15. Cox stopped short of saying which U.S. regulator, the SEC or the Commodity Futures Trading Commission, has authority to bring a lawsuit.
Prices for contracts linked to Las Vegas-based Harrah's Entertainment Inc. and Nashville, Tennessee-based HCA Inc. rose last year ahead of announcements or news reports that those companies were takeover targets.

In March, prices for swaps based on First Data Corp.'s bonds climbed 62 percent in the two weeks before Kohlberg Kravis Roberts & Co. bid for the company on April 2.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. The contracts, typically expiring after five years, pay if a borrower fails to meet its obligations on time.

Hedge funds and other investors have turned to the contracts to make bets because they're cheaper and easier to trade than the securities on which they're based.