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The hedge fund industry in the Commonwealth of Massachusetts will come under greater regulatory scrutiny according to Secretary of the Commonwealth William Galvin, who is the chief securities regulatory. This past January Glavin filed a civil complaint against Bulldog Investors and Phillip Goldstein, among other connected parties (collectively, the Respondents'). The civil complaint alleges Respondents failed to adequately restrict online access to information about the Respondents hedge fund products. According to the civil complaint filed by Galvin, Respondents maintain an interactive web site through which potential investors have unrestricted access to general advertising and offering materials.

Using guidance provided by the Securities and Exchange Commission on the use of electronic media in securities offerings, the civil complaint maintains that in order to conduct appropriately and legally a private offering of securities over the internet, a web site is required to be password protected. In this case, Respondents web site was not password protected.

It is this unrestricted access that is alleged by Galvin to be in violation of Massachusetts laws on public securities offerings. This contention is based on the argument that no attempt has been made to discern whether parties attempting to access the site are sufficiently sophisticated or financially suited to evaluate the risks of the investment opportunities presented. It is a requirement of the law that a determination be made about the sophistication and financial suitability of people accessing this type of information.

The ultimate contention in the complaint is that the hedge fund securities offerings by Respondents are alleged to constitute what legally is known as an unregistered, nonexempt, public offering of securities. Even though some safeguards were in place at the web site, there were not adeqyare controls overall, according to Galvin.

Respondents web site, which no longer is available online, is said to have once contained a printable offering brochure that included details on the investment opportunities in various Bulldog funds. The printable materials were also said to contain information investment strategies, annual returns and background information on the funds managers themselves. Galvin is seeking a cease and desist order to prevent what he contends are ongoing and continuous violations of Massachusetts securities laws.

In the past year, Galvin office initiated an investigation into so-called hedge fund hotels. Hedge fund hotels are large investment banks that provide hedge fund managers with office space and administrative and technical support. The contention here by Galvin is that there arrangements result in a serious conflict of interest. Galvin maintained that these arrangements needed to be disclosed fully to potential investors.