SEC's Investigation Unit 'Outgunned, On A Roll'

The Securities and Exchange Commission (SEC) — once accused by a whistle blower of not being able to find ice cream at a Dairy Queen — is experiencing something of a culture shift. Last year the agency filed a record 735 enforcement actions and collected nearly a billion dollars in penalties from companies with SEC violations. Audie Cornish talks to Devin Leonard, staff writer for Bloomberg Businessweek, about his article, "The SEC: Outmanned, Outgunned, and On a Roll."

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AUDIE CORNISH, HOST:

In New York, the federal trial of a former Goldman Sachs board member got under way today. Rajat Gupta has been accused of leaking stock secrets to a business associate who ran one of the world's largest hedge funds, the Galleon Group. That associate, Raj Rajaratnam, is now serving an 11-year prison term for insider trading.

These cases are borne out of work by the Securities and Exchange Commission. In fact, the SEC, once accused by a whistleblower of not being able to find ice cream at a Dairy Queen, is experiencing something of a culture shift. And they're making the turnaround with a fraction of the funding on Wall Street.

DEVIN LEONARD: Last year, the SEC's budget was 1.2 billion. Bank of America's total IT expenses were 4.2 billion. So they're really outgunned.

CORNISH: Devin Leonard is a staff writer with Bloomberg Businessweek. He's profiled the revival of the agency's enforcement division.

LEONARD: The SEC - under the Bush administration and more specifically, under chairman Chris Cox - had a reputation as being toothless, especially when it came to enforcement. And there are numbers that support that. The penalties under Chris Cox in 2008, when the markets were raging and all, you know, all sorts of things were happening - a lot of bad things were happening - the total number of penalties that the enforcement division collected were about quarter of a billion dollars.

Flash forward to 2011; they collected a billion dollars in penalties. The enforcement division has been largely reinvigorated and among other things, the director - new director, who's been there for three years; he was a former federal prosecutor - Robert Khuzami has created specialized units dealing with insider trading, dealing with hedge funds, dealing with municipal bonds, and dealing with structured products - you know, real estate CDOs and securitized real estate debt, that caused a lot of the problems in the financial crisis.

CORNISH: So it sounds like they're in a better position to - kind of go after the figures they're looking for on Wall Street. And you talk about the different folks in the department who, you know, share some credit in this. But in particular, you zero in on an investigator named Sanjay Wadhwa. Tell us about his background, and what he's doing differently.

LEONARD: Sanjay Wadhwa is a really interesting guy. He was born in New Delhi, and he worked for some big law firms before he came to the SEC. But one of the things he did was, he really became a specialist in insider trading. And he was largely responsible for building the case that led to, you know, the conviction by the U.S. Attorney's Office of Raj Rajaratnam, the co-founder of the Galleon Group.

But in the process, he became - I guess, second-in-command of the group within the SEC that just handles insider trading. So one of the things he does is, he helps teach people around the country, in the enforcement division, how to pursue insider trading more effectively.

CORNISH: What are the - I guess, what's the answer to that question? I mean, what are the things that he was doing differently, that have made a difference?

LEONARD: Well, I think one of the things that the SEC used to do is, they used to wait for tips to come in; or in some cases, there's something called FINRA - it used to be the NASD, the National Association of Securities Dealers - that would alert the SEC when there were - lots of trading before an event, or an earnings release in stocks. What the SEC does now, and one of the things that Sanjay has really helped push, is just to be more aggressive, to do a lot of analysis.

They've created a database, for one thing - you know, phone records and trading records - and just sort of creating sort of a whole approach to go after insider trading. And you can see that throughout the, you know, the Galleon case - not just with the conviction of Raj Rajaratnam, but there's nearly 60 other people who have been convicted as well. And the SEC played a large role in that. And obviously, the U.S. Attorney's Office is the one that convicted them, but the SEC was - played a key role, too.

CORNISH: So this is interesting, given that the SEC is much more limited in its powers of investigation than maybe we might assume.

LEONARD: Absolutely. I think a lot of people are surprised. I was certainly surprised, in doing the reporting for the story, to find out that the SEC is not permitted to listen to wiretaps in real time, while the U.S. Fish and Wildlife Division is, and so is the EPA. But here's an institution that's supposed to be supervising - or overseeing Wall Street, and they don't have the same powers that a lot of other federal agencies outside of the U.S. Attorney's Office, or the FBI, have. I think it's kind of - it's kind of eye-opening.

CORNISH: Devin Leonard, thanks so much for explaining it to us.

LEONARD: No, glad to be here. Thanks for having me.

CORNISH: Devin Leonard; he's a staff writer with Bloomberg Businessweek. He spoke to us about his reporting on investigators at the SEC.

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