SEC cracks down on fraud
Stung by criticism that the Securities and Exchange Commission failed to prevent Bernard L. Madoff’s massive Ponzi scheme, the agency has stepped up enforcement efforts to crack down on investor fraud and other scams.
With a new chairwoman, a new enforcement chief and a growing caseload, the agency has streamlined its internal procedures and gone to court with new urgency.
The SEC has obtained 27 emergency orders to freeze the assets of fraud suspects since the end of January, compared with seven during the same period one year ago, according to data released Thursday.
SEC staff and white-collar defense attorneys said they believed the upswing in enforcement could be attributed to the recession, which exposed frauds, and to a new attitude within the regulatory agency after Madoff.
In Los Angeles alone, the SEC regional office filed nine emergency asset seizures from January to April, a marked increase over prior years.
Among the targets were a Sherman Oaks investment manager accused of defrauding investors out of more than $17 million, an Irvine financier who allegedly defrauded Taiwanese investors out of hundreds of millions of dollars and a Beverly Hills hedge fund manager accused of operating a Ponzi scheme.
“These are four of the most exciting months of my career at the SEC, and I’ve been here 26 years,” said Rosalind Tyson, director of the SEC’s Los Angeles region, which enforces securities laws in Southern California, Arizona, Nevada and Hawaii.
“The pace has accelerated dramatically,” said Patrick Hunnius, who worked four years as an SEC enforcement attorney and is now a partner at White & Case’s Los Angeles office, specializing in securities law. “I think the turnover and the new director of enforcement at the SEC is having an immediate impact. . . . I think the pipeline moves a lot faster at the commission than it used to.”
The SEC’s new enforcement efforts were detailed Thursday by Robert Khuzami, its new enforcement chief, in testimony before a Senate subcommittee.
SEC Chairwoman Mary L. Schapiro has eliminated red tape that slowed investigations, allowing a single commissioner to approve subpoenas instead of requiring the full commission’s approval as required under former Chairman Christopher Cox, Khuzami said.
In all, the commission has initiated 287 investigations since the end of January, a 32% increase from the 217 investigations it opened during the same period last year, he said.
Former investment manager Harry Markopolos told Congress in February that the SEC ignored his “repeated and credible warnings” about irregularities in Madoff’s investment management.
“I gift-wrapped and delivered the largest Ponzi scheme in history to them and somehow they couldn’t be bothered to conduct a thorough and proper investigation,” he said.
Hunnius and other lawyers who practice white-collar criminal defense said they suspect that the Madoff lashing has inspired the SEC.
“We have heard the criticisms and the commentary and we are doing what any responsible trustee of the public faith should do -- we are using it to conduct a serious self-assessment to determine what we can do to improve,” Khuzami told the Senate Subcommittee on Securities, Insurance and Investment. “We need to do this so that we can restore investor confidence and send a strong message to would-be violators that the SEC is on the beat.”
In a March letter to the Government Accountability Office, Schapiro said “the reinvigoration of the SEC’s enforcement program is a top priority for me.”
“In this time of market crisis, it is more critical than ever for investors to have confidence in the SEC and its enforcement program,” the chairwoman said.
Tyson, director of the Los Angeles office, said it was now common to find attorneys working nights and weekends on breaking cases.
“The clear message from the commission is we should be acting quickly where investor funds may be at risk from an ongoing fraud,” Tyson said. “The staff has gotten the message.”
The upswing in enforcement cases is at least partially a result of the recession, which caused many investors to seek to withdraw funds they had deposited with fraudulent entities and to file complaints when the money was not returned, several analysts said.
The volume of complaints can be overwhelming. The SEC’s enforcement division received 700,000 complaints in the 2008 fiscal year -- about 700 for each of the agency’s 1,100 employees.
At Schapiro’s direction, the commission has retained a research and development company to review ways to track and investigate its overwhelming volume of complaints.
To protect investors from fraud, the SEC is going to need more money, Khuzami told the Senate subcommittee.
“An increased budget would enhance significantly our ability to make changes I believe we need to do our jobs to the best of our abilities,” he said.
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