The problem is that when hedge funds get in trouble they do not go to jail, are not prohibited from doing business and the penalties (fines) are ineffectively weak.

Given the track record of holding the powerful accountable is terrible, I don’t think this is directed at hedge funds but is a warning to the little people.

> The problem is that when hedge funds get in trouble they do not go to jail

Criminal prosecution is held to a much higher evidentiary standard than civil fines. Almost all market related crimes, including manipulation and insider trading, require mens rea. Proving state of mind beyond a shadow of a doubt is really difficult to do. Especially when the defendant is sophisticated enough to know the law and have access to high-quality legal advice.

Any US Attorney would absolutely love to have the feather in his cap of sending a billionaire hedge fund manager or investment banker to prison. Hell, the reason Rudy Giuliani is a household name is because he managed to do that. But no prosecutor is going to bring a case that he has no chance of winning.

Given that it makes much more sense to target enforcement with civil fines rather than criminal prosecution. You can tie up your resources to fight expensive, hard to prosecute criminal cases. Or you can quickly settle for reasonable fines, and cover many more cases with the same set of limited resources.

It’s common for hedge funds (and more importantly, the people who run them) to be prohibited from doing business. “Barred from the securities industry” is the term typically used if you’re looking for examples.

True.

But why does this sort of thing seem to be the norm? https://en.m.wikipedia.org/wiki/S.A.C._Capital_Advisors

This.

It's clear that everyone should be lawyering up depending on what positions they had when they started pumping this idea to the masses. That said, I'm a big believer in "a fool and his money". If there are hedge funds or retail investors out there who, perhaps, didn't understand all the risks of what they were doing, protecting them from their folly only causes more problems in the future.

As horrible as this sounds, now is the time to let everyone fail. Hard. If we don't, no lessons will be learned.

IANAL, but to me it seems like it would be very difficult to convict retail investors of investing in a stock they believe has value and then telling other people they invested in a stock they believe has value. Unless there are chat records of a few redditors coordinating an astroturf campaign while twirling their mustaches or whatever, I don’t see how this could be aimed at retail.

Regulated entities who have access to tools or information not available to retail investors, or who applied financial pressure to manipulate access to the markets, or did not disclose conflicts of interest...that seems like a much easier case to make.

It's also not as if hedge funds are employing thousands of welders or craftsmen. These are high risk financial strategies by people who qualify as professional traders - "I didn't know" isn't an excuse anymore. If they lose the game, they get to eat their losses.

We will probably see a few retail traders get burned, and I suspect anyone wanting to do trading in the future is going to have to fill out more disclaimers.

Maybe not hedge funds but I estimate that the majority of what laypeople call "hedge funds" are not hedge funds. There are tons of firms that just run money for ordinary people. At my old firm they have shorted blackberry in thousands of individual margin accounts, and those accounts are losing money on paper and might have to realize losses in order to rebalance their risk.

I'd have some questions if my low risk or medium risk investment firm was making large shorts. Shorts are very risky for a whole bunch of reasons - which is also why they can be high value. Don't get me wrong, I'm sure every high risk fund can find at least one pensioner invested in them, but if your firm is well known for shorting then you can't pretend to be anything but high risk/high reward.

These aren’t large positions and that is the point. If a short position that was 2% of your account suddenly becomes 10% of it, now you have a problem, and the problem wasn’t caused by a wrong investment thesis, it was caused by a mob of kids online.