SEC Ramps Up—New Enforcement Tools Include Cluster Analysis, Fuzzy Matching. Plus—Open Channels to DOJ, FBI.

“With New Firepower, S.E.C. Tracks Bigger Game,”  Ben Protess and Azam Ahmed  report at the New York Times Dealbook.

Embarrassed after missing the warning signs of the financial crisis and the Ponzi scheme of Bernard L. Madoff, the agency’s enforcement division has adopted several new — if somewhat unconventional — strategies to restore its credibility. The S.E.C. is taking its cue from criminal authorities, studying statistical formulas to trace connections, creating a powerful unit to cull tips and assign cases and even striking a deal with the Federal Bureau of Investigation to have agents embedded with the regulator.

In one of the agency’s first efforts, Mr. Khuzami and his boss,Mary L. Schapiro, the chairwoman, sought to tear down the agency’s bureaucratic barriers. The S.E.C. had more than 70 tip lines, including e-mail and voice mail, but no central repository. To consolidate the tip system, Ms. Schapiro dispatched a top lieutenant, Stephen L. Cohen, to help create a database from scratch.

Now, all tips and referrals — regardless of the source — are put in a single database. S.E.C. employees must put a tip into the system within three days.

The agency also created an office to analyze and manage the tips, resembling the F.B.I.’s terrorist review center. Called the Office of Market Intelligence, the unit serves as a “point guard” for the agency — harvesting investigative tips, conducting preliminary investigation and passing on cases to enforcement lawyers.

. . . In a less conventional move, the group is working closely with the Justice Department to share data and connect investigative dots. An F.B.I. agent is assigned to assist Mr. Sporkin’s team, sorting through potential cases to weed out bogus tips. The current agent, Bryan Smith, a former business consultant who specializes in white-collar fraud, can also tap into the F.B.I. database to see whether a subject has drawn past scrutiny.

. . .  As with much of the enforcement division, the market abuse unit, headed by Daniel M. Hawke, has taken a novel approach to insider trading cases. Rather than examining questionable trades in specific stocks, Mr. Hawke and his team now analyze suspicious traders and their network of connections on Wall Street. The investigators have turned to statistics, using tools like “cluster analysis” and “fuzzy matching,” to identify relationships and trading patterns that sometimes went undetected.

Some question the focus the agency puts on insider trading:

Some critics also question whether the agency’s intense focus on insider trading distracts from cases of greater significance to the economy and the financial system. Since the crisis, the agency has filed actions against several big banks but almost none against top executives running the firms. The agency points out, however, that it has sued 102 firms and individuals in cases tied to the crisis, including top executives at major mortgage firms.

“There are a lot of things that cause more harm to investors than insider trading,” said James D. Cox, a professor at Duke Law School. “On the scale of abuses to investors, I put it at a 3.”

Read the whole piece here.

 

Better Pay Attention to the Ref!

See also:  Gretchen Morgenson’s Saturday piece in the Times:  Is Insider Trading Part of the Fabric?

Meanwhile, the S.E.C. is already looking at the Facebook IPO offering.  Reuters reports SEC, FINRA to review Facebook issues, NASDAQ sued.  CNBC reports Facebook IPO Forensic Examination Begins.  The Washington Post adds:

Regulators are examining whether Morgan Stanley, the investment bank that shepherded Facebook through its highly publicized stock offering last week, selectively informed clients of an analyst’s negative report about the company before the stock started trading.

Rick Ketchum, the head of the Financial Industry Regulatory Authority, the self-policing body for the securities industry, said Tuesday that the question is “a matter of regulatory concern” for his organization and the Securities and Exchange Commission.