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March 13, 2013 Articles

Financial-Fraud Enforcement on the Rise

Trends show that the SEC, DOJ, and FBI will continue to increase their focus on financial-fraud enforcement in 2013.

By Laura O. Robinson

Fiscal year 2012 was robust for financial-fraud enforcement, and the Securities and Exchange Commission (SEC), the Department of Justice (DOJ), and the Federal Bureau of Investigation (FBI) all appear poised to invest even greater resources and commitment toward prosecuting financial fraud in 2013. Significant dollars are at stake: On par with its performance in fiscal year 2011, the SEC obtained orders for more than $3 billion in disgorgement and penalties in fiscal year 2012. In its most recent Financial Crimes Report to the Public, the FBI identifies more than $15 billion in restitution orders, recoveries, seizures, fines, and forfeitures for fiscal year 2012.

SEC’s Restructure Emphasizes Complex Securities Fraud
The SEC Division of Enforcement’s required and strategic reorganization over the last two years includes the creation of the Office of the Whistleblower (OWB) and the creation of specialized enforcement units focused on high-priority misconduct. After just one full year of operation, the OWB indicates in its Annual Report on the Dodd-Frank Whistleblower Program for fiscal year 2012 that it received more than 3,000 tips during the year.

The Division of Enforcement’s recently created strategic units include its Asset Management Unit, which focuses on investigations of investment advisers and investment companies, hedge funds, mutual funds, and private equity funds; its Market Abuse Unit, which focuses on large-scale market abuses and intricate manipulation schemes by institutional traders and other market professionals; and its Structured and New Products Unit, which focuses on complex derivatives and financial products including credit default swaps, collateralized debt obligations, and securitized products.

SEC ready to aggressively prosecute complex cases against well-funded defendants. In its recently released 2012 Annual Financial Report, the SEC highlights the implementation of its strategic plan incorporating hiring and in-house training focused on the development of an in-depth understanding of complex securities products and market practices, investment in new technology allowing a greatly improved ability to collect and analyze data, and a readiness to aggressively prosecute complex securities-laws violations against well-funded sophisticated defendants.

SEC enforcement actions remained substantial in fiscal year 2012, with 150 of the 734 enforcement actions brought designated by the SEC as National Priority Cases, a 30 percent increase of cases so designated compared with fiscal year 2011. The total number of enforcement actions in 2012 remained similar to the 2011 level, the only other year in the last decade to exceed 700 actions. In SEC-related criminal cases, prosecutors filed 126 indictments, informations, or contempts in fiscal year 2012.

Clear enforcement trends. As can be seen in data published by the SEC in various reports including its 2010, 2011, and 2012 Annual Performance and Financial Reports, as well as its 2010, 2011, and 2012 reports of select SEC and market data, more than 90 percent of the SEC’s enforcement actions over the last three years are classified as related to securities offerings, issuer reporting and disclosure, investment advisors/investment companies, delinquent filings, broker dealer/market structure, insider trading, and market manipulation.

A clear trend emerges in the SEC’s enforcement of these cases: Cases related to investment advisors/investment companies, delinquent filings, broker-dealer/market structure, insider trading, and market manipulation are on the rise, while the number of cases related to securities offerings and issuer reporting and disclosure are declining. The SEC brought 89 cases related to securities offerings in fiscal year 2012, a decline of 38 percent since fiscal year 2010. Similarly, the SEC brought 70 cases related to issuer reporting and disclosure in fiscal year 2012, a decline of 37 percent since fiscal year 2010.

The most striking increases in enforcement actions are seen in broker-dealer/market-structure cases and investment adviser/investment company cases. The SEC brought 134 broker-dealer/market-structure cases in fiscal year 2012, including cases related to improperly filled trades by stock exchanges due to database issues, alternative trading systems or “dark pools,” unauthorized trades, abusive naked short-selling with continuous failure to deliver, and manipulation of publicly traded stocks through placing orders that influence prices and are later canceled. These 134 matters represent an increase of almost 20 percent of these types of matters brought by the SEC compared with fiscal year 2011, and an increase of more than 90 percent of such cases initiated by the SEC in fiscal year 2010.

The SEC brought 147 investment adviser/investment-company-related cases in fiscal year 2012, including cases related to false representations regarding qualifications of investment advisors, quantum of monies under management; improper assessment and disclosure of fees and commissions; failure to adopt and implement compliance procedures; sale of fictitious securities; concealment of losses; and misappropriation of assets. These 147 matters reflect a more than 30 percent increase in the numbers of such matters brought by the SEC since fiscal year 2010.

The DOJ’s Strategic Plan Emphasizes Financial Fraud
The DOJ’s Strategic Plan for fiscal years 2012–16 identifies four priorities, one of which is to “protect Americans from financial fraud that devastates consumers, siphons taxpayer dollars, weakens markets, and impedes ongoing economic recovery.” The DOJ identifies eight areas of strategic focus to meet this priority: public and corporate corruption; mass-marketing fraud, identity theft, disaster-related fraud; health-care fraud; consumer protection; financial-institution fraud; intellectual-property crime; high-technology crime; and transnational organized crime.

The DOJ has highlighted its Financial Fraud Initiative to increase efforts to combat financial and mortgage fraud, requesting an additional $55 million for the investigation and prosecution of securities and commodities fraud, investment scams, and mortgage-foreclosure schemes in its fiscal year 2013 budget request. Of this $55 million budgeted increase, more than two-thirds is allocated toward increased criminal enforcement.

The Financial Fraud Initiative adds attorneys and other personnel to the FBI, the Civil, Criminal, and Civil Rights Divisions of the DOJ, as well as the U.S. Attorneys’ Office. The initiative allocates $15 million to the FBI (adding 40 agents), $5 million to the Criminal Division to add 16 attorneys and other personnel, $7 million to the Civil Division to add 38 attorneys and other personnel, $1.5 million to 10 new attorneys in the Civil Rights Division and other personnel, and the remainder, $26.5 million, is proposed to add 120 attorneys and other personnel to the U.S. Attorneys’ Office.

The FBI’s 2013 budget argues that the additional 40 agents are justified, stating, “The average return on investment for one corporate-fraud agent was approximately $54 million over the past three fiscal years.”

Expect to see the SEC, the DOJ, and the FBI maintain and increase their focus on financial fraud enforcement in 2013.

Keywords: criminal litigation, SEC, Securities and Exchange Commission, DOJ, Department of Justice, FBI, Federal Bureau of Investigation

Laura O. Robinson is managing director at Navigant Consulting in Washington, D.C.

Navigant Consulting is a corporate sponsor of the Section of Litigation. Neither the ABA nor ABA entities endorse non-ABA products or services. This article should not be construed as an endorsement.

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