Friday, September 15, 2006, 9/15/2006 08:06:00 AM

Hedge Funds and Trade Secrets

A report from Business Week concerning a challenge percolating through the SEC from New Jersey hedge fund manager, Phillip Goldstein, who is seeking to exempt his funds at Bulldog Investors from the SEC's Rule 13F which requires disclosure of hedge fund holdings when the funds cross the $100 million mark. Goldstein's rationale? The holdings are trade secrets and requiring their disclosure is a "taking" without compensation in violation of the Fifth Amendment to the Constitution. Before dismissing his chances, remember that Goldstein challenged an SEC hedge fund registration rule and got a federal appeals court to throw it out earlier this summer.

Currently, the SEC permits a fund to claim Freedom of Information Act confidentiality after filing but rarely, if ever, grants that relief.

In an interview, Goldstein offered some serious arguments in favor of his position which will be familiar to those who know and understand trade secrets law:

He referred to "services that say something like, why pay Carl Icahn or Warren Buffett their fees-why not just take their ideas and steal them and use them for yourself? To me, it's the same as somebody illegally downloading something from the Internet."

Also "where does the government have this authority to make people disclose what basically are trade secrets-the source of their earnings power-without paying for it?"

A fair question. We'll watch this one.

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