In the wake of the Bernie Madoff scandal, it looks like the SEC may be getting some new weapons. Because of a new rule, the agency's investigations will no longer be held up by political maneuvering between people or companies being investigated and SEC commissioners. On Wednesday, Enforcement Division Director Robert Khuzami told members of the New York Bar Association that he now has the authority to issue formal orders of investigation and that he intends to "delegate that authority to senior officers throughout the division."
This new power is a direct result of the failure to expose Madoff and his Ponzi scheme. Khuzami told his audience that "if defense counsel resist the voluntary production of documents or witnesses, or fail to be complete and timely in responses or engage in dilatory tactics, there will very likely to be a subpoena on your desk the next morning."
Under the previous SEC head, Christopher Cox, SEC staff had to wait for approval from the commission to issue subpoenas. With political maneuvering many could delay investigation or stop it completely. While the facts are still being investigated as to how Madoff avoided scrutiny by the SEC, this political manipulation was probably a factor.
In addition to the new subpoena powers, Khuzami announced he was forming five specialized units with staff specially trained for their areas of specialty. The five units include:
* An Asset Management Unit that will focus on investment advisors, investment companies, hedge funds and private equity funds.
* A Market Abuse Unit that will focus on large-scale market abuses and complex manipulation schemes by institutional traders.
* A Structured and New Products Unit that will focus on complex derivatives and financial products, including CDS, CDOs and securitized products.
* A Foreign Corrupt Practices Act that will focus on new and proactive approaches to identifying violations of the act.
* Municipal Securities and Public Pensions Unit that will focus on the expanding municipal securities market.
In addition to these new units, Khuzami also announced that he was forming an Office of Market Intelligence that will be "responsible for the collection, analysis, risk-weighing, triage, referral and monitoring of hundreds of thousands of tips, complaints and referrals that the Agency receives each year." This office is also a response to Madoff: the SEC received -- and ignored -- numerous tips about his firm; this office will help the agency make better use of the tips that it gets.
In order to encourage cooperation by individuals with SEC investigations, Khuzami also announced that he is seeking an "expedited process by which the Division Director is delegated authority to submit immunity requests to the Department of Justice." He wants to be able to insure witnesses early on in the investigative process that the SEC does not intend to file charges against them.
In addition to reorganization announcements, Khuzami put in a plea for funds. The SEC has seen about an 11 percent reduction in force since 2005 because of budget cuts. It has anti-fraud jurisdiction over 30,000 issuers, advisors, broker-dealers, and transfer agents, but only has 1,100 enforcement staff nationwide. He said, "With greater resources we can do more."
Khuzami, of course, had to pat himself on the back for all the work his division has done since he took over. He said they have filed more than 40 cases involving Ponzi schemes, including the most notorious since Madoff related to Stanford's alleged $8.2 billion Ponzi scheme. Those charges included bribing Leroy King, the CEO of Antigua's Financial Services Regulatory Commission. Khuzami's team has also filed 397 actions, 30 percent more than the 306 it had filed by this time last year.
Hopefully these changes will make a significant difference and put the SEC back on track to truly protecting investors.
Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies and Trading for Dummies.
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