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SEC Rolls Out 'Powerful Tools' in New England

This article first appeared in Massachusetts Lawyers Weekly, April 9, 2015.

This winter, in a snow-induced outburst of pique, a gentleman standing near me on the commuter rail casually trashed his former employer, a financial-services firm with a local office. He boasted to his companion that he could have brought the whole place down had he exposed their financial crisis-era shenanigans. After a pause, he then ruefully acknowledged that he should have - for the $100 million whistleblower award that he coveted!

Suffice it to say, the Securities and Exchange Commission believes that all those with information about securities fraud should come to us, whether or not they seek an award.
Moreover, a few years out from the financial crisis, we have numerous powerful tools, old and new, to capture and pursue such leads and to enforce securities laws generally.

The Boston Regional Office - or BRO - where I work is the SEC's enforcement and examination arm for all six New England states. We apply these tools, and our local resources, every day on behalf of investors.

These are some SEC and BRO strengths that every New England securities lawyer - and certain MBTA riders - should know about:

  • BRO Resources: Enforcement and Compliance

The BRO has 160 staff including 75 lawyers, accountants and others in Enforcement and 65 examiners, accountants and attorneys in the Office of Compliance Inspections and Examinations.

As part of its regional role, the BRO fosters ties to other regulators. BRO Regional Director Paul Levenson came to the BRO from the Department of Justice, where he served as chief of the Economics Crime Unit at the U.S. Attorney's Office for the District of Massachusetts.

The BRO's Enforcement wing, headed by SEC veteran John Dugan, keeps steady channels open to federal prosecutors and other regulators for referrals and live leads. The BRO also has Enforcement attorneys serving as special assistant U.S. attorneys and one formally assigned as liaison to the Boston FBI.

The BRO's Exam program, led by Kevin Kelcourse, another BRO veteran, advances industry compliance in the birthplace of the mutual fund and beyond and refers certain securities violations to BRO Enforcement for further action.

We also work with self-regulatory organizations such as FINRA, and its data-driven insider-trading referrals serve as an increasingly rich vein for BRO investigations centered on regional industries like pharmaceuticals.

  • Specialized Units: Focused Enforcement

In 2010, the SEC launched specialized enforcement units dedicated to five high-priority areas: asset management, market abuse, complex financial instruments, foreign corrupt practices, and municipal securities and public pensions.

With each investigation, the specialized units compound their members' focused expertise. In an emblematic case handled by the Asset Management Unit and BRO staff, the SEC announced in December that F-Squared Investments based in Wellesley "has agreed to pay $35 million and admit wrongdoing to settle charges that it defrauded investors through false performance advertising about its flagship product."

  • Market Intelligence: Handling Tips, Complaints and Referrals

What happens when we overhear a promising tip? It goes into "TCR"- the SEC's Tips, Complaints and Referrals system that went live in 2011.

Of course, the vast majority of the thousands of tips that the SEC receives each year aren't overheard by our staff. They come directly from members of the public, who usually submit them electronically in the same TCR system by pressing a big button you will find at www.sec.gov.

Regardless of who enters or refers a "TCR," the SEC's Office of Market Intelligence, which opened in 2010, immediately starts to work it up. If the TCR comes to the BRO, a BRO staff attorney dedicated to market intelligence (I'm one of them) will develop it further. The end result can be as swift and sure as a TRO to protect investor funds or a criminal referral triggering prompt arrests.

Other TCRs lead to investigations or cause examinations. Less promising tips remain stored in the TCR computer system, as appropriate, so they won't be forgotten.

  • Whistleblower Program: Insider Friends

As the gentleman on the commuter rail recognized, the SEC has a robust whistleblower award program, which went into effect in 2010 with the signing of Dodd-Frank. Sean McKessy, chief of the SEC's Office of the Whistleblower, explains that the SEC "is authorized by Congress to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to a commission enforcement action in which over $1 million in sanctions is ordered. The range for awards is between 10 percent and 30 percent of the money collected."

These strong incentives can move insiders and others with valuable information to the SEC's column. For example, in 2014 the SEC awarded one whistleblower approximately $30 million for reporting fraud to us. More recently, a former company officer earned a half-million-dollar whistleblower award for reporting wrongdoing that his company was aware of and failed to correct.

  • Data Analytics: Finding Risks, Proving Misconduct

The SEC uses data analytics to identify securities violations and high-risk firms and products. Aberrational-performance inquiries, for example, have helped SEC staff identify hedge-fund valuation misstatements.

Ranking algorithms and quantitative data sources have streamlined investigation into failures by insiders to file timely stock-transaction and stock-holding reports.

Needless to say, the SEC has many ways to combat fraud and hold wrongdoers accountable while rewarding those who help us. So don't be like the man on the train. If you or your client suspects a securities violation, let us know.

In the meantime, to learn more about what the SEC is up to in New England, follow the BRO on Twitter at twitter.com/Boston_SEC.

Eric Giroux is a staff attorney in the Boston Regional Office of the U.S. Securities and Exchange Commission. He can be contacted at girouxe@sec.gov. The SEC, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the commission or of the author's colleagues upon the staff of the commission.

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