Preet Bharara, the United States Attorney for the Southern District of New York, had a simple message for the hedge fund professionals assembled at the Metropolitan Club yesterday in New York for HedgeWorld’s Spring Fund Services Conference: If you’re going to act like a horse’s ass, then be prepared for prosecutors and regulators to come after you. And then he implored them not to act like horse’s asses.

Bharara, a professional in numerous contexts, including politically, although he has not yet sought an elected office, never used the term “horse’s ass.” He is too smooth for that. But his message was clear. Shenanigans in the financial industry have led to a deep mistrust of that industry by the public. That mistrust hurts the same capital markets that bankers, financiers and investment professionals claim to love.

Each time his office brings a case against someone in the investment industry—Raj Rajaratnam, for example—it confirms a deep suspicion among the broad population that the investing game is rigged.

“There is boiling over anger that hedge funds and financial institutions have not done enough to police themselves and regulators haven’t, either,” he said.

This is why Bharara’s office continues to bring cases, he said. “It is my feeling that our work is far from finished.”

Misdeeds also bring on scrutiny from politicians in state legislatures and in Congress. As if on cue, hours after Bharara spoke at the HedgeWorld conference, the Senate passed a financial reform bill. We can debate the merits of the bill, and whether it is overly stringent or not tough enough, but in this case the action is the message.

Speaking much more eloquently than I write, but still managing to seem blunt, Bharara urged everyone in the room to foster a culture of ethics at their firms. He told them not to wait until trouble strikes—someone from the SEC or his office shows up at the door—to educate people in the firm about how to behave properly and follow the law.

He called for a renewed focus on ethics and integrity.

And he made a distinction between “technical compliance” with the law, exploiting loopholes in the law or coming as close to the line as possible without crossing it, and actually following the letter and intent of the law.

When people in finance, investment banking and the hedge fund industry show up in the news portrayed as crooks, it reinforces an already negative image and creates a “genuine crisis of confidence in the system.”

“The larger victim is the general public,” Bharara said, “who vote and also invest in markets. Corrupt corporate leaders can turn off the investing public. That’s not good for the economy or democracy.”

Bharara got in some good one-liners—the stuff of good political speeches. He said the size and scale of the fraud schemes his office has exposed “would make Mr. Ponzi blush.”

Returning to his central message, Bharara closed with a call for personal responsibility.

“My resources are not without limits,” he said. At the end of the day, prosecutions are a “blunt tool” to enforce ethics and rules.

“People in this room can play a role in fighting off the creep of corruption that’s keeping my office so busy,” Bharara said. “There is nothing wrong with making money. Everyone in this room wants the public to have faith and confidence in this industry. At the end of the day, we are in this business, I believe, because we believe in markets. People who cheat cheat not just the markets, but you individually.”

This entry was posted on Friday, May 21st, 2010 at 11:10 am and is filed under Friday's Random Shots. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.