Like many growth industries that go a-courting in Congress, hedge funds have approached legislative and regulatory hurdles with lobbyists retained and pocketbooks open.
As hedge funds continue to attract a broader class of investors, however, they are discovering that educating lawmakers — overcoming one Securities and Exchange Commission (SEC) member’s recent admission that “there is no clear definition of what a hedge fund is” — can be even harder than playing the markets.
Most hedge funds begin as a pool of rich investors who use their combined wealth to play off falling stocks and securities with “short sells” and other risky trading moves. But one company, Cerberus Capital Management, is more than just a hedge fund.
Cerberus controls the Alamo and National car-rental chains and Albertson’s supermarkets and recently led a group that purchased GMAC, the profitable loan-financing arm of General Motors. When WorldCom went bust in 2003, Cerberus owned so much of its debt that one of the fund’s notoriously private executives testified before the Senate Judiciary Committee.
In late 2003, when the SEC began moving toward requiring all hedge-fund advisers to register with the agency, Cerberus and other previously unregulated hedges began fearing harsher new rules to come. In the Senate, independent-minded Banking Committee Chairman Richard Shelby (R-Ala.) had publicly criticized hedge funds’ role in misbehavior by mutual funds.
So Cerberus pitched to Shelby in classic Washington style: the fund threw a fundraiser, netting the senator’s leadership PAC $99,500 in a single day from Cerberus executives and allies. The PAC’s total haul Feb. 17, 2004, the day of the fundraiser, was $217,750, though it is unclear from Federal Election Commission (FEC) data how much of the non-Cerberus contributions were solicited or bundled by fund executives.
Five days before the fundraiser, Cerberus scored a win when then-Federal Reserve Chairman Alan Greenspan came out against the SEC hedge-fund rule, which already had met with skepticism from Republicans. Five months after the fundraiser, Shelby voiced qualms on hedge-fund registration during a hearing with then-SEC Chairman William Donaldson, the rule’s Republican chief architect.
“I have questions, which I hope to have answered, about whether adviser registration is the most effective means to address concerns voiced by the SEC,” Shelby said at the July 2004 hearing. Three weeks after that, though Shelby never publicly opposed the hedge-fund rule, Cerberus executives sent $22,000 in a single day to the senator’s campaign committee.
“I supported Donaldson where I could dealing with the regulation of hedge funds,” Shelby said. “Remember, Greenspan was against it.”
Despite high-profile opposition, the SEC implemented the rules in 2004.
Shelby spokesman Andrew Gray strongly denied that the fundraiser had any impact on Shelby’s actions on the hedge-fund rule, which has been challenged in court but remains a high priority for the new SEC chairman, former Rep. Chris Cox (R-Calif.).
“I’ll put the fundraiser in perspective in terms of its role in shaping Shelby’s position: none. Absolutely none,” Gray said via e-mail. “His standards come from a philosophical perspective. You will find, time and time again, that he comes from principled standards in terms of his philosophical beliefs.”
Gray also pointed to Greenspan’s counsel against forced hedge-fund registration, which the economic guru warned could spark a market downturn. Donaldson had requested that lawmakers hold off on a legislative solution to unregulated hedging, asking that the SEC be free to work its will.
Members of Congress made 16 personal visits with Greenspan between Feb. 17, 2004, and mid-2005, but Shelby was not one of them, according to Federal Reserve records obtained by The Hill under the Freedom of Information Act. Banking Committee member Sen. Chuck HagelChuck HagelSenators tear into Marines on nude photo scandal Lobbying World Who will temper Trump after he takes office? MORE (R-Neb.), whose Banking subcommittee will hold a hedge-fund hearing May 16, met with Greenspan four times during that span.
Shelby’s office declined to comment on whether Cerberus or the senator initiated the fundraiser, and Cerberus did not return several requests for comment. Shelby’s Defend America PAC reimbursed the fund two weeks after the event for $747 in “catering, car, room expenses,” according to FEC filings obtained through the nonpartisan Center for Responsive Politics.
Shelby is not the only congressional leader approached by Cerberus, which owns a paper company that is the largest private employer in tiny Russell County, Ala. USA Today first reported in January that Cerberus threw a fundraiser for House Appropriations Committee Chairman Jerry Lewis (R-Calif.) to lobby for continued funding of a WorldCom defense contract that would benefit the hedge fund.
Between November 2003 and April 2004, Cerberus sent $38,000 to Sen. Orrin HatchOrrin HatchOvernight Finance: US preps cases linking North Korea to Fed heist | GOP chair says Dodd-Frank a 2017 priority | Chamber pushes lawmakers on Trump's trade pick | Labor nominee faces Senate US Chamber urges quick vote on USTR nominee Lighthizer Live coverage: Day three of Supreme Court nominee hearing MORE (R-Utah) while the then-Judiciary Committee chairman spearheaded Senate oversight of WorldCom’s emergence from Chapter 11. Cerberus executives also gave $12,000 to former House Majority Leader Tom DeLay’s (R-Texas) Americans for a Republican Majority PAC during the 2004 election cycle.
Cerberus has spent $2.13 million on lobbying since 2003 and hired its first in-house lobbyist this year. Cerberus contract lobbyist Craig Whitney, a former top aide to Cerberus’s global investments chairman, former Vice President Dan Quayle, set up a PAC last year called Improve America that receives cash almost exclusively from Cerberus investors.
While Cox has begun training SEC inspectors to monitor hedge-fund compliance with the rule, touting more than 2,400 new registrations since it took effect in February, Cerberus appears to have found an exemption. The Hedge Fund reportedly has not yet registered, though it may do so in the future.
One securities lobbyist, who spoke on the condition of anonymity because he represents clients tracking the hedge-fund rule, said Cerberus took the same approach as any other business seeking new friends on Capitol Hill.
“The way to do it is, you set up a lobbying arm and get people to go and lobby and try to push back,” this lobbyist said.
He compared the hedge funds’ battle to the accounting industry’s public-relations strategy after bookkeeping shortcuts contributed to the stunning fall of Enron in 2001. While accounting lobbyists successfully staved off congressional intervention after Enron, the implosion of WorldCom made the Sarbanes-Oxley corporate governance law inevitable.
Cerberus’s hedge-fund competitors also have begun signing contract lobbyists to prepare for future legislative battles. Moore Capital Management has hired a team from Wilmer Cutler that includes Marianne Smythe, a former SEC investment-management director who also represented Democratic billionaire George Soros, who made his fortune from hedging. Farallon Capital recently hired the Normandy Group, a new firm opened by seven departed lobbyists from Fleischman and Walsh.
Elliott Associates, run by GOP hedge-fund king Paul Singer, retained powerhouse teams at Mehlman Vogel Castagnetti and Navigant Consulting to track last year’s bankruptcy and asbestos-litigation bills. Elliott executives boast fundraising skills to rival Soros and Cerberus, including $92,500 in personal donations from Singer to the National Republican Senatorial Committee since 2003.
Hedge-fund magnate James Chanos, whose Kynikos Associates hedge fund already has registered with the SEC, is diverging from the Cerberus strategy of under-the-radar lobbying with his plans for a second hedge-fund trade association. Chanos’s new coalition could serve as a counterweight to the Managed Funds Association (MFA), which criticized the hedge-fund rule during its initial stages.
Andrew Lowenthal, a former Democratic Banking Committee aide, represents Kynikos through his new shop, Porterfield & Lowenthal. Lowenthal emphasized that the Chanos coalition is still in its early stages.
Chanos’s “frustration with the way the industry was both perceived and responded to is why he’s trying to form a coalition,” Lowenthal said. “His belief is that one fund by itself is not going to be enough to play a significant policy role down here [in Washington].”