Should Dumb Rich People be Protected from Themselves?
Currently, the laws in North America which protect investors in securities and franchises are disclosure laws. These laws, very roughly, make it illegal to mislead the public and require the seller to provide information to the purchaser in a disclosure document.
However, there are exemptions to the mandatory disclosure. Again, very roughly, if you are a sophisticated investors, that is you have sufficient wealth, the seller need not provide you with the disclosure document owed to lesser mortals.
The theory behind this exemption is that wealthy people have sufficient resources to do their own due diligence.
However, the flip side of this exemption is never explored. If the wealthy have enough resources to do their own due diligence, why don't they shoulder the entire litigation burden when their due diligence fails? That would be a good way to regulate the hedge fund industry, wouldn't it?
Here is an example from THE DAILY CAVEAT and a hedge manager Sharon Vaughan, the mother of the actor Vince Vaughan.
The SEC accused Vaughn of defrauded clients in the by investing in a fraudulent prime-bank trading scheme, noting that Vaughn failed to perform adequate due diligence and neglected to disclose her trading strategy to investors. She followed this up by withholding and then submitting fraudulent documents to the SEC.
Terrific background on the fraud is over at the Naked Shorts. Spotlight News has a nice story on the fraud, as does the New York Daily News.
But let's look at what happened. According to the SEC complaint about Sharon Vaughan
, Ms. Vaughan involved her clients in a classic Prime Bank scheme. The complaint is nicely summarized at Securities Prof Law Blog.
Now the particulars of the scheme are depressingly familiar, but Ms. Vaughan's background is not. According to this Forbes article on the hedge fund fraud, Ms. Vaughan "Vaughn, 64, has long experience in real estate, insurance and investments". Just the type that doesn't need protection from fraud and con criminals, eh?
How did the story play out for the the sophisticated investors? Well, remarkably well -after the SEC sued the promoters for the return of the $25 million invested with Ms. Vaughan, according to the New York Daily News, "ábout $21 million has been recovered and returned to 27 investors - Sharon's own $2 million will be the last to be paid back should all the money be found. But without the SEC's involvement, it is very unlikely that the investors could have recovered this money so swiftly, as the money which was repatriated came from several sources in Europe.
But the wealthy investors didn't have to pay a dime for their legal costs. Why - if they truly want to be exempt, then shouldn't they pay the entire freight charge for being lax in their due diligence?
