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Major Fraud (and “Broken Windows”) Update: Governance and Accountability 101

By Dennis A. Stubblefield of Shustak Reynolds & Partners, P.C. posted on Thursday, October 16, 2014.

Dennis A. Stubblefield

Dennis A. Stubblefield


“If every rule is a priority, then no rule is a priority.” So observed SEC Commissioner Michael Pinowar, in his speech Tuesday, questioning the efficacy of the Commission’s so-called “Broken Windows” approach to Enforcement. His pointed and poignant remarks force the Commission–and really each and every one of us and our clients–to ask the question: “are we properly governing ourselves, and our institutions, and are we effectively accountable to those who we serve?” His comments were delivered on the same day that Rep. Scott Garrett (R-N.J.) told Finra to slow down its ambitious, but very controversial, so-called “CARDS” customer-data-gathering initiative. As reported by Investment News (“Congressman tells Finra to hold CARDS” (by Mark Schoeff Jr.)), Representative Garrett, who heads the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, warned that “he is far from convinced that this new, costly and burdensome proposal is needed.” Clearly, serious voices within the Commission, and up the line in Congress, are taking this important debate–about effectiveness of securities regulation and enforcement–to the next level.

We recommend reading the Pinowar speech from beginning to end. It is a due process-based analysis of whether the SEC is properly discharging its Enforcement responsibility. It seeks to generate debate on what it really means to be all about “investor protection” when, Pinowar fears, perhaps too many smaller dollar-figure cases against local predators are being neglected in favor of the more conventional, press-worthy, and stat-driven big institution splashes. He points out, for example, that in big accounting fraud cases, “…the risk to any single investor of financial reporting fraud by any single issuer can be mitigated by holding a diversified portfolio of securities…[o]n the other hand, a dishonest or corrupt broker, investment adviser, or promoter might cause an investor to lose all of his or her investment [which might account] for 100% of that person’s holdings. So we must ensure that our efforts appropriately focus on these types of frauds as well.” (He further notes that many of these frauds are perpetrated against senior citizens and urges that the Commission, which last held a Senior Summit in 2006, put “the protection of seniors back high on the agenda.”).

But Commissioner Pinowar goes further. For example, in suggesting that the mandate of the Commission’s Ombudsman be broadened from its current focus on merely the concerns of “retail investors,” Pinowar reinforces the notion that all constituents–including the individuals and entities regulated by the Commission–deserve fundamentally fair and even-handed treatment, based on the notion of due process, particularly in our brave new world of administrative proceedings on steroids.

As we wrote a few weeks back, “our thoughts exactly.” However, the Commission, to its great credit, continues to do very good things, like pushing out micro-cap enforcement cases and investor alerts, including its most recent: “SEC Staff Issue Risk Alert…” and “SEC Charges Current and Former E*TRADE Subsidiaries…”. Micro-cap fraud (like Ponzi Schemes and their ilk) continues to be a scourge upon the generally honest capital markets. The SEC should make stamping it out–including holding gatekeepers accountable–one of its very highest priorities!

Our vote is for the SEC to do a “Management 101” 360-degree feedback exercise on itself–does anyone see evidence of it here as a predicate for the Commission’s new “Strategic Plan?”–and formulate a truly effective approach to securities enforcement. Every honest and well-meaning constituent would benefit by this, and hopefully at a compliance cost which will not break the bank.

Dennis Stubblefield, Erwin Shustak and the team at Shustak Reynolds & Partners, P.C. focus on securities enforcement defense, internal investigations, and litigation and arbitration for broker-dealers, investment advisers, funds and others involved in the retail delivery of financial products and services. Learn more about Shustak Reynolds & Partners, P.C.

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