Madoff scam may spark tightening of hedge rules

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Veterans of the secretive $1.5 trillion (£1 trillion) industry say the $50 billion Madoff fraud could bring about sweeping changes in the way the authorities monitor activity.

"This is an Enron moment for hedge funds," said Peter Rup, chief investment officer at New York hedge fund Orion Capital Management. "Regulation would be welcome, primarily from a trust standpoint."

Enron, once the world's largest energy-trading firm, collapsed in 2001 amid allegations of accounting fraud. Less than a year later, US lawmakers passed the Sarbanes-Oxley Act, which set tighter corporate accountability rules for publicly traded companies.

Suggestions for rule changes for hedge funds include strengthening whistleblower programmes and imposing capital requirements similar to those for mutual funds. Rup and others argue this would restore confidence in the market.

Madoff was registered with the US Securities and Exchange Commission, but many funds that fed him money invested by customers were not. Critics of greater regulation argue that tighter rules would not have made a difference in uncovering the Madoff fraud.

Phillip Goldstein, the founder of Bulldog Investors in New Jersey, said: "I don't see the connection between Madoff and more regulation. Isn't fraud already illegal?"