The arrest and trial of Galleon Group co-founder Raj Rajaratnam has pushed hedge funds to take a new and serious look at their compliance practices, reports Reuters.

Firms such as Paulson & Co and Millennium Management have reportedly spent millions to hire former regulators as advisers. Firms are also taking a more serious look at restricting their employees’ personal trading and efforts to keep data safe, as well as instructing employees to be more cautious on what to write in emails and securing laptop computers that may contain sensitive client data.

And yes, the “expert networks” of industry insiders who may have provided information to hedge fund analysts in the past are coming under closer scrutiny, too.

“For some time, hedge funds have clamped down, tightening compliance procedures, and making sure that they’ve got their staff trained on them,” said Peter Turecek, senior managing director at risk consulting group Kroll Inc.

Compliance is now a key to survival for hedge funds at a time when any “whiff” of scandal can send a major investor running for the door. The Reuters article points out that three of the four hedge funds raided last year as part of the ongoing insider trading probe have closed their doors, primarily due to heavy investor redemptions that resulted soon afterward.

Hedge fund managers and employees are now painfully aware that nothing put in writing is truly private or confidential. Employers have the legal right to investigate and gain access to staff emails. Even a deleted email can be traced. And, as we’ve seen in the investigation, the government intercepted and monitored more than 2,000 of Rajaratnam’s emails and private telephone conversations, as well as others’.

That revelation, more than anything, may have sent the biggest chill among hedge fund professionals. Some hedge funds are now even hiring private security firms to search for listening devices in their offices. Although industry insiders say they are more concerned about rivals stealing their information, than government snooping.

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