Shady Trades Clip Another Hedge Fund

The case for closer scrutiny of the hedge fund industry got even tighter last week when yet another adviser was charged with illegal trading activity.

The Securities and Exchange Commission recently passed a new rule that would require hedge fund managers to register with the regulator like any other investment adviser. Registration would give the SEC the legal latitude it needs to more tightly police the industry and even conduct investigations when it suspects malfeasance.

The rule, which takes effect later this year, has met opposition from some corners. One manager, Phillip Goldstein at the $85 million New York hedge fund Opportunity Partners, is suing the SEC to get the rule overturned. Goldstein has called the rule "overreaching" and said it would lead to SEC "fishing expeditions" that take valuable time away from managing money to "filling out forms and checklists."

But news that 36-year-old Michael Tom, manager and part owner of the Burlington, Mass., hedge fund GTC Growth Fund, was charged with five counts of insider trading on Thursday afternoon would seem to bolster the SEC's argument.

According to the U.S. Attorney's office, Tom allegedly aggressively traded in common stock and options in Charter One Financial in 2004 after a former colleague tipped him that the bank was about to be bought by Citizen's Financial Group, a unit of Royal Bank of Scotland Group. The tip, authorities claim, came from Shengnan Wang, a portfolio analyst at Citizen's whom Tom had helped hire when he worked at the Providence, R.I., bank.

Tom, of Waltham, Mass., has been charged with five counts of insider trading. Hedge funds with assets under management that exceed $25 million must register with the SEC by Feb. 1.