SEC Employs New Tactics to Catch White Collar Criminals

The backlash from the Bernie Madoff scandal was unmistakable. New Yorkers are still reeling from the effects, which could be felt for years from the swindler who stole millions of dollars and ruined people's lives. Madoff can be seen as the epitome of terror on Wall Street. He falsified records, lied and cheated his way to millions of dollars in profits. Raj Rajaratnam was another Wall Street swindler who ordered colleagues and consultants to leak information that made him a billionaire. However, he was sentenced to 11 years for running an insider-trading conspiracy, forcing him to trade his luxury suits and Manhattan penthouse for a yellow jumpsuit and a tiny prison cell.

The Securities and Exchange Commission does not want cases such as these to slip through the cracks ever again. Therefore, it has been employing a host of new tactics to stop white collar criminals in their tracks. In 2009, as part of an initiative to combat hedge fund fraud, the SEC began developing a computer program designed to take information from hedge fund organizations in order to analyze their data, as first reported by the Wall Street Journal.

Robert Kaplan is the co-chief of the SEC Enforcement Division's Asset Management Unit. The Asset Management Unit is one of many units, as Kaplan pointed out, that investigate a potential misuse of hedge funds, private equity funds, mutual funds and investment advisers.

Kaplan told International Business Times' Crimes of New York that various units in the SEC including, Office of Compliance Inspections and Examinations and The Division of Risk, Strategy, and Financial Innovation, determined what hedge funds would be deemed suspcisious.

After we ran quantitative analytics, we did a qualitative evaluation to determine whether further investigation was appropriate. According to the data, Kaplan says there were several companies that appear to be performing too well.

When you have aberrational performances, it basically asks the question 'why?' says Kaplan. Why would one market neutral fund beat another neutral fund?

Kaplan could not divulge the exact details or the algorithm used in the aberrational performance initiative, but it certainly has been effective. In fact, on Dec. 1, 2011, the SEC released several names and companies that have been charged with fraud.

We're using risk analytics and unconventional methods to help achieve the holy grail of securities law enforcement--earlier detection and prevention, says Robert Khuzami, Director of the SEC's Division of Enforcement, in a statement. This approach, especially in the absence of a tip or complaint, minimizes both the number of victims and the amount of loss while increasing the chance of recovering funds and charging the perpetrators.

Kaplan explained that the SEC investigated a number of different violations for various companies. Organizations such as ThinkStrategy, LeadDog and Solaris Management LLC were charged with various white color crimes. ThinkStrategy and the managing director, Chetan Kapur was charged with fraud. Kapur allegedly engaged in deceptive conduct in an effort to raise their track record, size and credentials, according to the statement. LeadDog Capital Markets and owners Chris Messalas and Joseph LaRocco had not properly disclosed certain information to its investors. Solaris Management LLC operator Patrick Rooney is charged with fraudulently misusing assets.

Kaplan explained how various funds on the market are compared to peer funds. However, the profits that these organizations were reporting stuck out it investigators and they deserved a look.

Maybe you hold multiple funds and you are cherry picking or maybe you are engaging in insider trading, he says. There is even an easier explanation, the returns are just fabricated.

Kaplan says that the new computer technology and date analysis allows the SEC to investigate white color crimes before they get out of hand.

It gives us the ability to catch frauds earlier, he says. However, with all the advancements and new techniques, Kaplan still says it is important to use old fashioned investigative skills to catch Wall Street crooks.

While the use of analytics can be an important source of investigative leads, we also will continue to actively use complaints, tips and referrals.