SEC Chairman Mary Jo White spoke at the SIFMA Compliance & Legal Society Annual Seminar in Orlando, Florida, about the SEC’s “all-encompassing enforcement” efforts. The three prongs of these efforts are the use of criminal, civil and regulatory tools to enforce the securities laws. Her speech focused on the criminal prong.
She stated that any violation of the federal securities laws and regulations can be a criminal violation if done willfully, that is, with intent to violate the law. She added that in the vast majority of criminal securities fraud prosecutions, the SEC’s Enforcement staff works closely with the criminal authorities, including the DOJ, FBI, and state and local law enforcement. When the SEC finds sufficient evidence of a serious violation to justify criminal involvement, it alerts the appropriate criminal authorities. In some cases, they conduct parallel investigations. The criminal authorities will sometimes decide to conduct undercover investigative operations, while the SEC takes the lead in documentary review and analysis of records.
The SEC typically files its actions on the same day as the authorities handling the criminal side of the matter, unless there is some investigative reason for one agency to act first, such as a need for an emergency asset freeze or to stop a flight risk. Often, the SEC action names additional defendants who are not part of the criminal case, including those who did not necessarily act with intent to advance the scheme, such as the gatekeeper who permitted the scheme to proceed or the supervisor who failed to appropriately supervise the wrongdoers. The SEC charges these additional defendants because it believes that it is important to proceed broadly against other participants in a scheme to ensure that they too are called to account.
Chairman White also discussed the stand-alone cases the SEC brings.
She next spoke about specific types of enforcement actions. Many insider trading cases start out as a referral to the SEC from FINRA or the Options Regulatory Surveillance Authority containing an “informational nugget” suggesting suspicious trading, or are triggered by the SEC’s own trade data analytics that identify possible patterns of insider trading. She noted that SEC staff may engage in hours of trade analysis, detailed electronic scrutiny of phone records, bank records, emails, and texts to dig for evidentiary scraps that are necessary to build a case.
She described a recent case in which the SEC filed a civil action against a registered representative at a large broker-dealer and the managing clerk at a prominent international law firm. The SEC charged that the two engaged in a four-year insider trading scheme that generated $5.6 million in trading profits by trading in advance of more than a dozen corporate transactions for which the law firm provided advice. Investigators uncovered illegal tips that allegedly were conveyed through a middleman who met with the trader at Grand Central Station, showed him hand-written notes of the stocks he should trade, and then ate the notes to cover his trail.
She then spoke about microcap fraud, which typically involves pump-and-dump schemes where the volume and price of the stock are artificially inflated by means of a misleading promotional campaign that lures investors to buy shares. Chairman White stated that these cases often originate with a trading analysis that shows patterns of trading suggestive of illegal activity. The SEC then identifies the promotional statements feeding the trading activity, investigate whether and how those statements may be actionable, identify the promoters and other participants orchestrating the scheme, and follow the stock and money, often through nominee entities with complex corporate structures, transfer agents, broker-dealers, banks, and often, off-shore financial institutions.
Chairman White concluded her speech by discussing financial fraud.
Click here to access the speech.