The Securities and Exchange Commission named six people on Wednesday to lead new investigative units
The Securities and Exchange Commission named six people on Wednesday to lead new investigative units and unveiled a new policy for rewarding prompt cooperation by those with knowledge of misconduct as the agency reorganizes its enforcement efforts.
The SEC was scorched by its failure to detect the stunning, long-running fraud by money manager Bernard Madoff despite numerous red flags and credible warnings.
The new units and their leaders are: asset management, headed by Bruce Karpati and Robert Kaplan; market abuse, led by Daniel Hawke; structured and new products, Kenneth Lench; foreign corrupt practices, Cheryl Scarboro; and municipal securities and public pensions, Elaine Greenberg.
All of the unit chiefs come from within the agency. The new units reflect areas of high priority for the SEC, and are in response to the growing complexity and speed of the markets and burgeoning financial products. They will be able to detect emerging fraud and file cases quickly, the SEC said.
SEC Enforcement Director Robert Khuzami also announced new measures designed to encourage companies and individuals to cooperate more closely in providing information.
The SEC also set up a new Office of Market Intelligence to analyze the hundreds of thousands of tips and complaints received by the agency each year. It will be headed by Thomas Sporkin, who has been deputy chief of the SEC’s Office of Internet Enforcement since 2001.
The SEC inspector general recommended late last year that the agency create a new system for handling tips and complaints to prevent another breakdown like the one that allowed Madoff’s massive Ponzi scheme to flourish for nearly two decades.
For the first time, the SEC will have a formal framework of incentives for gaining the cooperation of people who witnessed instances of securities fraud — and “who can walk into a courtroom, raise their right hand and tell their story to the world,” Khuzami said at a news conference at agency headquarters.
The same types of cooperation incentives have been used by the Justice Department in its criminal investigations but haven’t been available to the SEC enforcement attorneys pursuing civil cases, Khuzami said. They include formal written cooperation agreements under which SEC attorneys recommend leniency for parties providing information in their proposals to the SEC commissioners, who must approve enforcement actions.
Also, the SEC will defer prosecution against cooperating companies or individuals in some circumstances.
“Our new cooperation program has the potential to be a game-changer for the enforcement division,” Khuzami said.
“Latecomers rarely will qualify for cooperation credit, so there is every reason to step forward — before someone else does — while you are in a position to benefit from your knowledge of wrongdoing,” he said.
Khuzami, a former federal prosecutor who came to the SEC in March 2009 from Wall Street investment firm Deutsche Bank, said the agency has undertaken the most extensive restructuring of the enforcement division in more than 30 years.
Early last year, SEC Chairman Mary Schapiro ended a policy requiring agency enforcement attorneys to get approval from the SEC commissioners before negotiating fines and penalties with companies accused of violations.
The inspector general, David Kotz, also recommended making it easier for junior-level enforcement attorneys to bring their concerns to top managers.
In reports by his office issued last year, Kotz chronicled in detail how the SEC bungled five investigations of Madoff’s business between June 1992 and December 2008, when the financier confessed the scheme to his sons. Kotz found that enforcement staff lacked adequate guidance on how to properly analyze complaints, and therefore failed to thoroughly review a complaint on Madoff brought to them in 2001 by private fraud investigator Harry Markopolos.
Madoff, who pleaded guilty in March 2009, is serving a 150-year sentence in federal prison in North Carolina for what could be the biggest Ponzi scheme in history, with investor losses estimated so far at $13 billion to $19 billion. It destroyed thousands of people’s life savings, wrecked charities and gave the financial system another big jolt.