S.E.C. Enforcement Chief: ‘Creative Investigation Techniques’ Coming
November 23, 2009
The use of wiretaps and recordings of conversations to help underpin the insider trading case against the Galleon Group hedge fund struck legal experts as unusual, for an investigation involving the Securities and Exchange Commission.
“It is unusual,’’ said Robert S. Khuzami, the director of enforcement at the S.E.C., at a discussion of hedge fund regulation at the Practising Law Institute in New York Monday. But, a year from now, “I hope it’s more common.’’
Khuzami noted that the S.E.C. has no wiretapping authority. That belongs to the U.S. Department of Justice, which would have to act in concert with the securities regulator on a probe of potentially illegal activity.
But don’t be surprised if more creative techniques involving the capturing of electronic messages or other evidence are used as the S.E.C. tries to step up its game, in the wake of the multibillion-dollar Ponzi scheme run by Bernard L. Madoff and other fallout of the two-year-old financial crisis. Prosecutors built their case against former Bear Stearns Cos. hedge-fund mangers Ralph Cioffi and Matthew Tannin around e-mail messages.
“We will do everything we can to adopt whatever creative investigation techniques that appear appropriate to the case” being pursued, he said.
Khuzami said the commission is not just interested in insider trading or fraudulent investment management schemes. Also of interest: how assets get valued and how performance of investments get reported to investors.
While the “very large majority of (hedge) funds run their operations in a lawful and proper manner,’’ the commission’s enforcement division has set up three national groups to investigate possible violations in:
- Asset Management – Focusing on issues ranging from disclosure to misappropriation involving investment advisors, investment companies, hedge funds and private equity funds.
- Structured and New Products – Focusing on the lack of transparency in complex derivatives and financial products, with particular attention paid to new instruments.
- Market Abuse – Focusing on large-scale market abuses and manipulation perpetrated by institutional investors and market professionals.
This group, Khuzami noted when announcing all the units in August, specifically will be involved in developing in-house technology to be used in analyzing suspicious trading activity.
Monday, he also noted that “real-time records” will likely be looked for, in cases involving how investment firms come to value assets they hold.
Each of the three groups will have its own unit chief and staff across 12 national offices of the S.E.C. Their creation was designed to consolidate internal expertise and make it easier to hire in these specialties from the securities industry.
