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News February 1, 2010 Issue

New Unit Chiefs Offer Snapshots On Priorities

They’re looking for trouble with sophisticated new tools, and they’re on the offensive. They’re targeting the big firms, and intend to bring high-profile "message" cases to change your behavior.

When all the new chiefs were announced for the Division of Enforcement’s specialized investigation units, those chiefs had something to say ;. One by one, they offered up some insight on what’s in store under their watch.

Bruce Karpati, co-chief of the Asset Management Unit, said the asset management industry has grown larger, and is much more sophisticated and complex. "The events of the last two years have highlighted the need for us to closely monitor the full spectrum of the financial services industry, from sophisticated financial institutions and investors to individual retail investors," he said. The asset management industry is now in a period of consolidation, which brings new risks, including the potential for increased conflicts as advisers grow in size and complexity.

Robert Kaplan, Karpati’s co-chief, emphasized the development of specialized expertise and industry knowledge to continue to aggressively pursue enforcement problems. This will result in better identification of asset management violations by understanding the "operations, motivations and strategies" of advisers. Kaplan anticipates that developments in risk analysis and technology will enhance investigations, and he committed that the unit will "collaborate with others to leverage resources and expertise."

Daniel Hawke, chief of the Market Abuse Unit, will focus on suspected large-scale, "organized" insider-trading, large cap market manipulations, front running, collusive trading, best execution, abusive short selling, and other "systemic, institutional regulatory violations." The unit will go on offense, he said, and will develop and deploy automated trading data analysis to gain strategic advantage in complex trading investigations, particularly those involving large institutions. The unit will bring "message" cases and work closely with criminal authorities. Hawke pledged that his group will be relentless as it seeks to "instill apprehension in those market participants who violate the law that they are undertaking ever-increasing risk of detection and consequences."

Kenneth Lench, chief of the Structured and New Products Unit, said that "like the cop walking the beat, we must know the neighborhood and have a visible presence."

He intends his unit to accomplish that through a thorough and timely understanding of structured products and other new complex financial instruments as they are introduced to the marketplace. Lench plans to leverage his newly concentrated resources into quickly bringing some "high-impact enforcement actions." He will strategically initiate risk-based investigations that will make it possible "to find wrongdoing that otherwise would have never seen the light of day, and dramatically alter market behavior." Lench also views his unit as a mini think-tank that will be an additional resource for investigators across the country and others at the agency alike. "The products are complex, the markets are opaque, the individuals are savvy, and their lawyers are smart," he said, and "we need to be every bit as intelligent and motivated as the professionals we regulate."

Cheryl Scarboro, chief of the Foreign Corrupt Practices Act Unit, also envisions a more proactive approach to enforcement of the FCPA. She sees "more targeted sweeps and sector-wide investigations, alone and with other regulatory counterparts both here and abroad" as defining elements of that approach. Scarboro intends to raise the Commission’s profile on the global stage by playing a more active role in international regulatory working groups and building closer relationships with non-U.S. regulatory counterparts. "Aggressive enforcement of the FCPA is essential in a world of increasing interdependence," she said. Companies and executives that comply with the law should not be outmaneuvered by those who don’t. Her unit will leverage the efforts of the SEC, the Department of Justice and foreign regulatory counterparts to "level the playing field worldwide."

Elaine Greenberg, chief of the Municipal Securities and Public Pension Unit, believes that specialization will facilitate the Commission’s ability to more effectively police what she described as the highly diverse and thinly regulated municipal securities market. Through the development of strong cases that send a "resounding message" about particular conduct, she intends to have an impact on the behavior of market participants. The unit will develop the case law and legal precedent by bringing "high impact" cases, and will "proactively seek to identify market activities that pose the greatest risk of harm to investors and are indicative of potential violations.

Thomas Sporkin, chief of the new Office of Market Intelligence, said his office will spearhead a new approach to proactive intelligence gathering. "We are going to blend the public complaint information that formerly came in through our Enforcement complaint center with the complex market data provided by the self regulatory organizations," he said. The resulting "integrated information tapestry" will aid in identifying market practices and activities that pose risks to investors.

His office will work with other SEC divisions and offices on the new "Tips Complaints and Referrals" workflow system being implemented Commission-wide in the coming weeks and months. That system will enable searches for information relevant to an investigation, and can be "mined for fraud trends." OMI also plans to build and operate a state-of-the-art data collection, surveillance and analytics room, said Sporkin. The tools in this room will include a real-time trade data database, and will permit staff to cross-analyze data from multiple databases.