SEC market-abuse chief takes trader-based approach (Reuters)

NEW YORK, February 25 (Complinet) – The Securities and Exchange Commission market-abuse unit is using new approaches to in an effort to better identify insider trading and abusive conduct by market professionals.

Unit Chief Daniel Hawke said the SEC is using a trader-based approach to look for patterns across groups of people, such as related trades across different products and markets by a single trader or connected group of traders. The new approach has given the SEC a greater ability to detect relationships among traders, and bring cases against large trading networks.

Daniel Hawke, who is the national unit chief of the market abuse unit in the SEC Division of Enforcement, and director of its Philadelphia regional office, was speaking to a gathering of industry practitioners earlier this month at the SIFMA Compliance and Legal Society in New York.

The market abuse unit is structured to deal with a trend toward more-organized insider trading, Hawke said.

Historically, cases have been one-off or limited in scope, in terms of numbers of securities or traders involved. He characterized insider trading as "very tribal" in nature, involving only a close-knit circle of friends and family members with a high degree of trust among one another.

However, in the last few years, an increasing number of market professionals have been involved in tipping and trading on material non-public information. The establishment of the market-abuse unit in 2010 was in response to this "institutionalization" or "professionalization" of insider trading among market professionals. In addition to taking an issuer-based approach, where monitoring would be focused on a single stock, the market abuse unit is looking at traders and asking what securities are common to them.

The SEC market abuse unit currently consists of a staff of 50 and 2-3 specialists and support staff across eight regional offices and its home office. Ten of the staff are in New York, nine in Washington, with the rest spread between Los Angeles, Denver, Chicago, Philadelphia, San Francisco and Boston. Sanjay Wadhwa, who is deputy of the unit, and assistant regional director of the SEC's New York office, is among those leading the Galleon insider trading case.

RISK-BASED APPROACH

Hawke is in a unique position given that he is both regional director and chief of one of the new specialized enforcement units. He has participated in the restructuring of both the enforcement and Office of Compliance Inspections and Examinations (OCIE) programs.

The SEC is developing stronger risk-assessment capabilities in its enforcement and exams, given that it lacked a robust system to identify risk, or to deploy resources based on risks and emerging trends.

Enforcement director Robert Khuzami and OCIE head Carlo DiFlorio were fully engaged in bringing regional leaders together in a way that improved performance management and accountability at all levels, Hawke said. The regional directors are now better integrated with the SEC national leadership, and regularly talk with one another on national program issues.

Each regional office is now able to see tips, complaints and referrals coming into other regional offices. This is part of the larger SEC system to track incoming tips, and which goes toward having better intelligence-gathering and risk management.

In the division of enforcement, management streamlining also eliminated a tier of management at the branch chief level, which has resulted in a ratio of six staff to one manager, roughly double that of the past.

ENFORCEMENT UNITS

Hawke described the five specialized enforcement units created by the SEC in response to recognition that they needed to develop more specific expertise. The unit scopes were decided after extensive debate and analysis, and they represent 20-30 percent of the enforcement division staff.

-- Asset management group: covers investment advisers, hedge funds, private equity and valuation, has 60 staff attorneys and specialists, is led jointly by Rob Kaplan and Bruce Karpati.

-- Market abuse unit: covers market structure investigations, large scale and organized insider trading, large cap market manipulation, and system platform violations, is led by Hawke and his deputy Sanjay Wadhwa.

-- Structured and new products unit: is led by Kenneth Lench and his deputy Reid Muoio, covering portfolio trading strategies in products such as complex derivatives and financial products, comprises 30 people.

-- Municipal securities and public pensions: is led by Elaine Greenberg in Philadelphia and her Deputy Mark Zehner, and recently conducted the case against State of New Jersey for misrepresentation of public pension liabilities.

-- Foreign corrupt practices: an area in which enforcement made their reputation in 1970s with the 'questionable payments' cases, is led by Cheryl Scarboro and comprises 20 people.

The division of enforcement created the Office of Market Intelligence to collect and analyze information from the public that may have come in to the division. SEC Chairman Mary Schapiro has stated that a new central tips, complaints and referrals system is also being developed. The five specialized units all have interaction with market intelligence office, and it will also work closely with the new whistleblower staff.

SUBPOENAS IN MINUTES

Among the reforms to the division of enforcement's process is the delegation of formal authority by the commission to the director of enforcement and, through the director, to the division's senior officers. The new power allows, sometimes on very short notice, a unit chief like Hawke to approve a formal investigation if there is a need for subpoena power. Thus, if the SEC has examiners at a firm which refuses to produce documents it can issue a formal order "in a few minutes."

The SEC is putting intense focus on its own internal controls, in the same way it expects regulated firms to. Among the controls it has put in place is a system for better tracking Wells notices -- the notices that enforcement staff use to inform individuals and entities that the staff is considering recommending charges to the commission against them.

The Dodd-Frank Act contains a requirement for the SEC to better monitor the use of Wells notices. Staff will now need to decide, within six months of issuing a notice, unless extended, whether to recommend an enforcement action, and firms can expect staff to be more aggressive in completing the Wells process within the six-month period.

NEW EXAMS

Restructuring of the OCIE, the inspections and exams office, began in 2010 and is still continuing, although more it is more decentralized than enforcement. The goal of OCIE's restructuring is to clarify OCIE's mission and develop a more risk-focused program through improved industry compliance, better communications, and new ways to conduct exams. OCIE is seeking to improve its ability to detect and prevent fraud, monitor new and emerging risks, set up a robust risk analysis capability, and inform SEC policy.

Governance of OCIE has been restructured so that it is more inclusive of the agency's regional directors and associate regional directors, who each participate on either OCIE's new executive committee or one of its four steering committees.

OCIE is establishing specialist working groups some of which compliment the subject matter of the division of enforcement's specialized units. They include new and structured products, equity market structure and trading practices, fixed income and municipal securities, microcap fraud, marketing and sales practices. Hawke confirmed that OCIE incorporated planning for hedge fund examinations as it has proceeded with its restructuring, as well as for state examination of investment advisors with under $100 million in assets under management.

A streamlined exam process will also be more efficient in the way examinations are conducted and by incorporating what is learned from the exams into the OCIE's risk assessment process and communicating relevant information within the SEC. This involves better use of information technology by making the process more automated. Hawke acknowledged that "our technology is very outdated" and said improvements would be "very budget dependent."

(This article first appeared in Complinet (www.complinet.com) Complinet, part of ThomsonReuters, is a leading provider of connected risk and compliance information and on-line solutions to the global financial services community.) (Nick Paraskeva is principal of Reg-Room LLC, which provides regulatory information and consultancy. He covers various facets of the banking and securities industry and delivers exclusive analysis through Complinet. He can be contacted at nparaskeva@nyc.rr.com.)

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SEC market-abuse chief takes trader-based approach (Reuters)

NEW YORK, February 25 (Complinet) – The Securities and Exchange Commission market-abuse unit is using new approaches to in an effort to better identify insider trading and abusive conduct by market professionals.

Unit Chief Daniel Hawke said the SEC is using a trader-based approach to look for patterns across groups of people, such as related trades across different products and markets by a single trader or connected group of traders. The new approach has given the SEC a greater ability to detect relationships among traders, and bring cases against large trading networks.

Daniel Hawke, who is the national unit chief of the market abuse unit in the SEC Division of Enforcement, and director of its Philadelphia regional office, was speaking to a gathering of industry practitioners earlier this month at the SIFMA Compliance and Legal Society in New York.

The market abuse unit is structured to deal with a trend toward more-organized insider trading, Hawke said.

Historically, cases have been one-off or limited in scope, in terms of numbers of securities or traders involved. He characterized insider trading as "very tribal" in nature, involving only a close-knit circle of friends and family members with a high degree of trust among one another.

However, in the last few years, an increasing number of market professionals have been involved in tipping and trading on material non-public information. The establishment of the market-abuse unit in 2010 was in response to this "institutionalization" or "professionalization" of insider trading among market professionals. In addition to taking an issuer-based approach, where monitoring would be focused on a single stock, the market abuse unit is looking at traders and asking what securities are common to them.

The SEC market abuse unit currently consists of a staff of 50 and 2-3 specialists and support staff across eight regional offices and its home office. Ten of the staff are in New York, nine in Washington, with the rest spread between Los Angeles, Denver, Chicago, Philadelphia, San Francisco and Boston. Sanjay Wadhwa, who is deputy of the unit, and assistant regional director of the SEC's New York office, is among those leading the Galleon insider trading case.

RISK-BASED APPROACH

Hawke is in a unique position given that he is both regional director and chief of one of the new specialized enforcement units. He has participated in the restructuring of both the enforcement and Office of Compliance Inspections and Examinations (OCIE) programs.

The SEC is developing stronger risk-assessment capabilities in its enforcement and exams, given that it lacked a robust system to identify risk, or to deploy resources based on risks and emerging trends.

Enforcement director Robert Khuzami and OCIE head Carlo DiFlorio were fully engaged in bringing regional leaders together in a way that improved performance management and accountability at all levels, Hawke said. The regional directors are now better integrated with the SEC national leadership, and regularly talk with one another on national program issues.

Each regional office is now able to see tips, complaints and referrals coming into other regional offices. This is part of the larger SEC system to track incoming tips, and which goes toward having better intelligence-gathering and risk management.

In the division of enforcement, management streamlining also eliminated a tier of management at the branch chief level, which has resulted in a ratio of six staff to one manager, roughly double that of the past.

ENFORCEMENT UNITS

Hawke described the five specialized enforcement units created by the SEC in response to recognition that they needed to develop more specific expertise. The unit scopes were decided after extensive debate and analysis, and they represent 20-30 percent of the enforcement division staff.

-- Asset management group: covers investment advisers, hedge funds, private equity and valuation, has 60 staff attorneys and specialists, is led jointly by Rob Kaplan and Bruce Karpati.

-- Market abuse unit: covers market structure investigations, large scale and organized insider trading, large cap market manipulation, and system platform violations, is led by Hawke and his deputy Sanjay Wadhwa.

-- Structured and new products unit: is led by Kenneth Lench and his deputy Reid Muoio, covering portfolio trading strategies in products such as complex derivatives and financial products, comprises 30 people.

-- Municipal securities and public pensions: is led by Elaine Greenberg in Philadelphia and her Deputy Mark Zehner, and recently conducted the case against State of New Jersey for misrepresentation of public pension liabilities.

-- Foreign corrupt practices: an area in which enforcement made their reputation in 1970s with the 'questionable payments' cases, is led by Cheryl Scarboro and comprises 20 people.

The division of enforcement created the Office of Market Intelligence to collect and analyze information from the public that may have come in to the division. SEC Chairman Mary Schapiro has stated that a new central tips, complaints and referrals system is also being developed. The five specialized units all have interaction with market intelligence office, and it will also work closely with the new whistleblower staff.

SUBPOENAS IN MINUTES

Among the reforms to the division of enforcement's process is the delegation of formal authority by the commission to the director of enforcement and, through the director, to the division's senior officers. The new power allows, sometimes on very short notice, a unit chief like Hawke to approve a formal investigation if there is a need for subpoena power. Thus, if the SEC has examiners at a firm which refuses to produce documents it can issue a formal order "in a few minutes."

The SEC is putting intense focus on its own internal controls, in the same way it expects regulated firms to. Among the controls it has put in place is a system for better tracking Wells notices -- the notices that enforcement staff use to inform individuals and entities that the staff is considering recommending charges to the commission against them.

The Dodd-Frank Act contains a requirement for the SEC to better monitor the use of Wells notices. Staff will now need to decide, within six months of issuing a notice, unless extended, whether to recommend an enforcement action, and firms can expect staff to be more aggressive in completing the Wells process within the six-month period.

NEW EXAMS

Restructuring of the OCIE, the inspections and exams office, began in 2010 and is still continuing, although more it is more decentralized than enforcement. The goal of OCIE's restructuring is to clarify OCIE's mission and develop a more risk-focused program through improved industry compliance, better communications, and new ways to conduct exams. OCIE is seeking to improve its ability to detect and prevent fraud, monitor new and emerging risks, set up a robust risk analysis capability, and inform SEC policy.

Governance of OCIE has been restructured so that it is more inclusive of the agency's regional directors and associate regional directors, who each participate on either OCIE's new executive committee or one of its four steering committees.

OCIE is establishing specialist working groups some of which compliment the subject matter of the division of enforcement's specialized units. They include new and structured products, equity market structure and trading practices, fixed income and municipal securities, microcap fraud, marketing and sales practices. Hawke confirmed that OCIE incorporated planning for hedge fund examinations as it has proceeded with its restructuring, as well as for state examination of investment advisors with under $100 million in assets under management.

A streamlined exam process will also be more efficient in the way examinations are conducted and by incorporating what is learned from the exams into the OCIE's risk assessment process and communicating relevant information within the SEC. This involves better use of information technology by making the process more automated. Hawke acknowledged that "our technology is very outdated" and said improvements would be "very budget dependent."

(This article first appeared in Complinet (www.complinet.com) Complinet, part of ThomsonReuters, is a leading provider of connected risk and compliance information and on-line solutions to the global financial services community.) (Nick Paraskeva is principal of Reg-Room LLC, which provides regulatory information and consultancy. He covers various facets of the banking and securities industry and delivers exclusive analysis through Complinet. He can be contacted at nparaskeva@nyc.rr.com.)

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Oil spill claims chief announces new payment rules (AP)

JACKSON, Miss. – The administrator of BP's $20 billion Gulf oil spill fund announced new rules Friday on how final payments will be determined in the highly criticized claims process, but the central payment formula remained unchanged from a proposal released earlier this month.

Kenneth Feinberg, the Washington lawyer who oversees the fund, said in a news release that he'll begin making payments based on the rules.

He's been criticized about the size and pace of payments. During a speech before the rules were released, Feinberg said Friday that he took into consideration hundreds of comments he has received in recent weeks, including numerous complaints that he wasn't distributing enough money fast enough.

However, the plan announced Friday was largely the same as the proposal Feinberg made earlier this month, before more than 1,400 claimants, public officials and others weighed in on the matter.

Under the plan, claimants would receive twice their documented 2010 losses. Oyster harvesters would be offered four times their losses. One change is that he's allowing is for oyster processors to collect the same payment that he's allowing oyster harvesters to claim.

"I think the process is working well. I do think I've heard enough about lack of transparency and lack of consistency that we have to do something about that," Feinberg told reporters after his speech at Mississippi College School of Law, which was hosting a forum on the oil spill.

Feinberg has been under pressure to streamline the process and be more generous with payments.

Some lawmakers have demanded the White House step in and provide more oversight of the program. Louisiana Gov. Bobby Jindal and others want a federal judge to intervene in the fund, which was set up to compensate for losses from the massive oil spill caused by the April 20, 2010, Deepwater Horizon disaster.

Feinberg, who was lauded for his work overseeing the compensation fund for 9/11 victims, insists he is being fair, but he said the volume of claims is immense.

There have been more claims filed in the oil spill program in one day than were filed during the entire 9/11 program, he said.

He said weeding out suspicious claims is another challenge, adding that there have been at least 8,000 suspicious claims submitted.

Feinberg said 254 claims that he denied were appealed to the U.S. Coast Guard. The Coast Guard sided with Feinberg and his Gulf Coast Claims Facility every time, he said.

"I think we're doing something right," he said.

Still, an Associated Press review published this week — based on interviews with legal experts, government officials and more than 300 Gulf residents — found a claims process beset by red tape and delay.

Feinberg said $3.6 billion has been paid so far on some 190,000 claims.

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Vt. Guard chief warns he's target of Facebook scam (AP)

MONTPELIER, Vt. – A Facebook and Skype scammer used the name and photo of a high-ranking Vermont National Guard general to steal $3,000 from a Canadian woman in what's believed to be one of a number of frauds that exploit the authority of the military.

The Toronto woman made two wire transfers to London, believing she was helping Maj. Gen. Michael Dubie pay for a shipment of money to Canada after a tour in Iraq. At least two other women, in Taiwan and Germany, have responded to pleas from someone they believed to be Dubie, the guard said.

In October, a Skype user claiming to be Dubie asked the Toronto woman to be friends, she said Tuesday, asking that her name not be used because she fears for the safety of her family.

"I was kind of in awe of the whole thing, that someone like that was contacting me," she said. "I wanted to help someone like that who is an honest, trustworthy person."

The person claiming to be Dubie refused to talk on the phone or video chat.

"He was so adamant that it was him," she said. "He said no, he can't talk to me because he is in Iraq."

Members of the military are frequent targets of such online frauds, said Rick Breitenfeldt, a spokesman for the online and social media branch of the National Guard Bureau at the Pentagon.

People "have a soft spot in their heart for service members," he said.

The woman, a mother of one, started getting calls from a heavily accented man claiming to be a United Nations diplomat representing Dubie. In exchange for the money, she was promised help setting up a business.

A third wire transfer of about $1,500 was blocked after an employee at the wire transfer company became suspicious.

Finally, just before Thanksgiving, she contacted the Vermont National Guard and learned she was not dealing with the real Dubie, though the contacts lasted until just before Christmas.

Though the person's claims didn't add up — paying to ship money, the London address, the refusal to voice verify — the woman said she wanted to help the military.

"I am very naive. I am too honest and trusting of people," she said. "Now I am extremely cautious. It's made me question my whole Internet usage."

Facebook closed several fake accounts purporting to be Dubie at the request of the Vermont National Guard, but at least five were still active Monday. After being asked about the fake pages, Facebook took them down.

"It has come to my attention that there are people using my identity to solicit money on FB and Skype," Dubie wrote Friday on his legitimate Facebook page. "I will never ask for money from anyone in cyberspace."

Breitenfeldt said the Dubie case is the highest-ranking target he's dealt with, but he's had about a dozen such cases since June 2008 and suspects there are more.

"Sometimes it's like playing whack-a-mole," said Breitenfeldt.

Facebook officials do all they can to protect users' identities, "but there is always room for improvement," spokesman Frederic Wolens said in an e-mail.

Using a fake name or identity is a violation of Facebook's policies, he said, and encouraged users to report such activity.

Skype offers communication methods including video chat and instant messaging that scammers have also used.

"User protection is very important to Skype," the company said in an e-mail. "That's why we help you control your online experience by providing easy-to-use and effective online security options."

The scam that targeted Dubie is a variation of old Internet scams like phishing e-mails, Breitenfeldt said.

"Facebook is such a newer platform," he said. "People haven't trained themselves to look at things with a critical eye."

To experienced Facebook users, the fake pages are easy to spot. The profiles have just a handful of friends, use improper grammar and cite details that don't square with the real person's background.

Maj. Juanita Chang, the Army's social media chief, said she encouraged high-ranking soldiers to post real profiles just so their names couldn't be co-opted by impostors.

Vermont National Guard 1st Lt. Dyana Allen said that by studying the messages sent in Dubie's name, she's come to believe it was carried out by a single person.

"He's charming and he tries to get people to trust him first," she said. "It's a very simple scam."

Ultimately all three women contacted the Vermont National Guard headquarters and were told the correspondence was a fraud.

Vermont guard spokesman Lt. Col. Lloyd Goodrow said the case has been referred to the FBI. Dubie, through Goodrow, declined to comment.

"He is quite upset by this," said Goodrow.

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Palin hires a chief of staff (Politico)

Sarah Palin has hired a veteran operative to serve as a chief of staff to her loosely organized team, one of the biggest indicators yet that the former Alaska governor is leaning toward a run for the White House.

POLITICO confirmed late Friday night that Palin has hired Michael Glassner to serve the key role.

Continue Reading "We are excited that Mike has agreed to come on to help the team," SarahPAC treasurer Tim Crawford said.

Glassner will be tasked with bringing greater organization to the far-flung and small staff that resides in several different states and time zones.

Glassner, whose hiring was first reported by CNN, is a former aide to ex-Sen. Bob Dole and is familiar with Palin from his service on John McCain's 2008 presidential campaign.

One of the key hurdles most Republican operatives say Palin has to clear in order to seriously run for president is hire an experienced staff. Glassner is a step in that direction.

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