The drinks were flowing in Miami Beach that evening when Wall Street’s top cop crashed the party.
As dealmakers crowded around the sleek circular bar at the Fontainebleau hotel in Miami last September, folks from the Securities and Exchange Commission were mingling, looking for their next big case.
Awkward, yes — but not uncommon these days. Like a skunk at a garden party, the SEC has been moving in on the fun-loving Wall Street conference circuit in hopes of getting a better handle on who’s up to no good in the world of finance. Officials scour attendee lists to spot the biggest players in advance and, properly wearing name tags, schmooze over drinks. Of course, they don’t accept any — that’s a no-no under SEC policy.
The SEC isn’t the only regulator trawling conferences for tips of suspicious conduct. The Commodity Futures Trading Commission was especially transparent about its intentions when it set up a booth in the middle of an industry gathering in March. Attendees at the opulent Boca Raton Resort & Club in Florida were greeted by smiling agency officials handing out metal whistles emblazoned with “CFTC” and mouse pads advertising their toll-free number.
The efforts show how regulators are trying to step up their game after missing Bernard Madoff’s Ponzi scheme and facing criticisms that they didn’t spot Wall Street abuses that led to the 2008 financial crisis.
“You have to credit the SEC for trying to understand what’s actually happening in the market,” said Pat Smith, a former federal prosecutor and partner at Smith Villazor in New York. “There’s been a lot of criticism over the years that there’s a lack of sophistication about markets and industry practice.”
The SEC has focused on bond conferences including ABS East and ABS Vegas, said people with knowledge of the matter who asked not to be named because the regulator’s efforts aren’t public. Held at luxury hotels in Miami as well as Las Vegas, the four-day conferences bring together investors and originators of debt backed by everything from car loans to jewelry.
Kevin Callahan, an SEC spokesman, declined to comment as did Caitlin Fitzpatrick for Information Management Network, the conference organizer.
No surprise that the SEC is focusing on asset-backed securities. Chastened by the collapse in bonds tied to home loans and other debt that sparked the financial crisis, the SEC has set up specialized units and hired industry experts to try to leverage tips from insiders.
Most industry gatherings have online networks where participants can communicate with each other and see who plans to attend. The SEC has used those lists to e-mail attendees, asking whether they might be free to chat at the conference, said the people.
One person who met with SEC officials while attending a conference in Miami said the agency’s pitch is simple: It can’t adequately police markets if it doesn’t know where to look for bad behavior, the person said.
SEC enforcement attorneys have also held closed-door discussions with groups of investors from companies such as Vanguard Group Inc. and BlackRock Inc., said one of the people. At one meeting, SEC officials said the firms should feel open to sharing information with regulators, particularly when practices strike them as inappropriate, the person said. While Vanguard does not comment on specific meetings with government agencies, “we work to build good relationships and strong rapport with various regulators on policy-related issues,” Vanguard spokeswoman Katie Hirt said.
BlackRock spokesman Ed Sweeney declined to comment.
One possible downside of the SEC’s social sleuthing is that officials will get so close to industry employees that some may be lured to leave for higher paying jobs on Wall Street, said James Cox, a professor at Duke University School of Law.
“Overall, it’s a good thing but a byproduct could be that SEC officials develop contacts for an industry job down the line,” Cox said.
Still, the latest overtures have led to some SEC inquiries of possible wrongdoing, according to a person familiar with the matter. And in prior years, investigations into securitized debt have yielded high-profile cases for the government. Based on a tip from one of his customers, Jesse Litvak, the former Jefferies Group LLC trader, was convicted of fraud in 2014 for misleading clients about how much he made on bonds he sold. That conviction was overturned in December with a new trial set for July.
Some people approached at conferences have begged off talking because they don’t want to be seen as cooperating with the government, according to a person familiar with the matter. But enticing whistle-blowers should be a bit easier these days. The 2010 Dodd-Frank Act allows the SEC to give tipsters bigger awards in more types of cases. The agency in 2014 paid more than $30 million, its largest ever, to a source living outside the U.S. in an undisclosed case.
“It shows creativity and a more aggressive approach to investigations,” said Stephen Crimmins, a former SEC enforcement lawyer who’s now with the firm Murphy & McGonigle. “They’re willing to experiment.”
— Check out FINRA’s Ketchum Warns on Dangers of Poor Firm Culture on ThinkAdvisor.