Is Regulation the Best Safeguard Against Investment Fraud?
Predictably, the Madoff financial scandal has prompted calls for stricter regulation of the investment industry, just as the collapse of the Manhattan Capital hedge fund led to calls for new anti-fraud regulations in 2004. If those regulations reduced fraud significantly, they would seem to be a reasonable solution to a real problem, but at least two assumptions underlying the SEC’s proposal in 2004 were dead wrong, financial journalist Chidem Kurdas argues in the winter 2009 issue of The Independent Review. First, government regulators already possessed the ability to detect fraud at Manhattan Capital. Hence, the extra benefit of the SEC’s proposal was unclear. Was the SEC engaging in a bureaucratic cover-up or trying to justify a larger budget? Second, securities regulations themselves can increase the likelihood that an investment will turn sour: by lulling investors into thinking their funds are more secure than they really are, regulations reduce the incentive to closely monitor o
