The SEC was inept in regulating Manhattan Capital, just as today's news highlights the agency's inability to keep Bernard Madoff from stealing from his clients.
The knee-jerk reaction that "we need more regulation" comes more from ideology than knowledge. The Kurdas case study is revealing.
"Federal and state laws against fraud have been on the books for centuries, and at this stage are so voluminous that it would take a long time simply to read all of them. Deceiving one's clients is illegal, regardless of the exact regulatory regime in place. Public agencies do not lack the authority to tackle the problem wherever it occurs. The SEC can demand access to any hedge fund if it suspects fraud and ask a court to take action against the manager ... Mental blind spots are common to all of humanity, whether in the market or government."