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S.E.C. letter to Senator Grassley

S.E.C. letter to Senator Grassley

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Published by: DealBook on Jun 10, 2011
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06/10/2011

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UNITEDSTATES
SECURITIESANDEXCHANGECOMMISSION
WASHINGTON,D.C.20549
DivisionofEnforcement
June9,2011
RobertSKhuzamiDirector(202)551-4894(202)772-9279(fax)khuzamir@sec.gov
TheHonorableCharlesE.GrassleyRankingMemberCommitteeontheJudiciaryUnitedStatesSenate152DirksenSenateOfficeBuildingWashington,DC20510DearRankingMemberGrassley:AstheDirectoroftheDivisionofEnforcement,ChairmanSchapiroaskedthatIrespondtoyourMay24,2011letterconcerningcertainreferralsfromtheFinancialIndustryRegulatoryAuthority("FINRA")totheSECrelatedtoSACCapital.Yourletterrequestedinformationconcerning(I)themannerinwhichtheCommissionresolvedeachreferral;(2)howthenumberofreferralsconcerningSACCapitalcomparedtoreferralsof"similarlysituatedfirms";and(3)whetherWellsnoticeswere"everdraftedwithregardtoSACCapitalrelatedtoanyofthesereferralsorrelatedtoanyothermatter."IamwritingtoprovideyouwithinformationconcerningactionstakenbytheSECgenerallyinresponsetoSROreferrals(includingpotentialinsidertrading-relatedreferrals)andtohighlightsomeoftheSEC'scontinuingeffortstocombatinsidertrading,particularlyinsidertradingbyhedgefundsandhedgefundpersonnel.AsSECstaffcommunicatedtoyourstaffonJune7,inordertoprotectconfidentialandnonpublicinvestigativeinformation,wegenerallydonotcommentonthestatusofinvestigationsorrelatedreferrals,and,intum,arenotprovidinginformationconcerningthespecificFINRAreferralsyouidentified.Aswillbediscussedinmoredetailbelow,wehavefilednumerouscasesalleginginsidertradinginvolvinghedgefunds,hedgefundmanagers,financialprofessionals,corporateinsiders,andattorneyswhounlawfullytradedonmaterialnonpublicinformation.Ourinvestigationsoftenutilizeconfidentialcooperatorsandsophisticatedinvestigativeandanalyticaltechniques-frequentlyincoordinationwithcriminalauthorities-todevelopsignificantinvestigativeleadsthat,ifcompromised,couldharmthegovernment'sabilitytostopillegalconductandholdwrongdoersaccountable.SECstaffwouldbehappytomeetwithyourstafftodiscussSROreferralsgenerally,ourmethodsofanalyzingandprocessingSROreferrals,andourinsidertradingenforcementinitiativesandmethodsofinvestigation.
 
2
ActionsTaken
by
theSECinResponsetoSROReferrals
AllSROreferralsreceivedbytheCommissionarehandledbytheDivisionofEnforcement'sOfficeofMarketIntelligence("aMI"),whichwasestablishedinJanuary2010.aMIhasdevelopedacoordinatedintake,triage,andresolutionprocessforhandlingallTips,Complaints,andReferrals("TCRs"),includingSROreferrals,receivedbytheCommission.
1
Inthelasttwofiscalyears,theSECreceived721SROreferralsrelatedtopotentialinsidertradingviolations,including493suchreferralsfrom
FINRA.2
Ingeneral,thesereferralsidentifypotentiallysuspicioustradingbyanumberofindividualsandentities,andprovidebackgroundinformationonthesecurityinvolved,theindividualsorentitiesengagedinthetrading,andanyrelevantcorporateorothereventsthatoccurredatoraroundthetimeofthetrading.OncereceivedbyOMI,furtheranalysisisnecessary.AgroupofdedicatedstaffwithinOMIreviewsallSROreferrals,includingreferralsthatidentifypotentiallysuspicioustrading.IfOMIdeterminesthatanSROreferralisrelatedtoanexistinginvestigation,thatreferralisdirectedtotherelevantinvestigativegroup.SROreferralsnotdeemedrelatedtoanongoinginvestigationarefurtheranalyzedbyOMItoassessavarietyoffactors.Afterthisreview,aMIdirectstheSROreferralstoappropriateinvestigativestaffacrossalloftheSEC'soffices,tootherregulatoryagencies,ortotheSEC'sOfficeofComplianceInspectionsandExaminations.Incertaininstances,OMIclosessomeSROreferralswithnofurtheractionbutmaintainstheinformationcontainedinthemforfutureintelligencegathering.Oncepotentiallysuspicioustradingisidentified-whetherfromanSROreferralorfromothersourcesofinvestigativeleads-andaninvestigationiscommenced,Enforcementstaffundertaketheoftenpainstakingworkofcollectingandanalyzingtradingdataacrossequityandoptionsmarkets,communications(email,telephonecallsandinstantmessages,amongothers)andmarket-movingevents(e.g.,corporateearnings,productdevelopment,andacquisitionsandmergers)toidentifypersonswhomayhaveengagedininsidertrading.Next,Enforcementstaffmustestablishaprovablecasebyidentifying,amongotherthings,thesourceandmaterialityof
I
theinsideinformationandevidencethatthetraderkneworshouldhaveknowntheinformationwasobtainedbydeceptionorinviolationofafiduciaryorotherduty.Throughoutourinvestigativeprocess,Enforcementstaffhasavailablearangeofinvestigativetechniques.Inadditiontotraditionalinvestigativetechniquessuchastestimonyanddocumentreviewandanalysis,wehavenewtools.Theseincludeseekingassistancefromcooperatingwitnesses-boththroughtheSEC'snewcooperationinitiativeestablishedinJanuary2010andtheexistingprogramsavailabletocriminalauthorities-thatencouragekeyfactwitnessestoprovidevaluableinformation.WealsoarehopefulthatournewWhistleblowerProgram,
1
PriortothecreationofOMI,SROreferralswereacceptedandreviewedbytheEnforcementDivision'sOfficeofMarketSurveillance.
2
Duringthatsametimeframe,theSECreceivedatotalof1,666SROreferrals.AnumberofthesereferralsrelatetoexistingEnforcementinvestigations.
 
3authorizedundertheDodd-FrankWallStreetReformandConsumerProtectionActof2010andwhichwillbeeffectiveasofAugust12,2011,willprovehelpfulintheefforttocombatinsidertrading.TheDivisionofEnforcementalsoisintegratingSROreferralsintotheTCRsystemtoallowstafftosearchacrossallSROreferralsandidentifytradersthatmaybecommontomultiplereferrals.Inaddition,wecontinuetodevelopourAutomatedBluesheetAnalysisProject("ABAP"),spearheadedbytheDivisionofEnforcement'snewMarketAbuseUnit.TheABAPseekstomoreeffectivelyutilizethe"bluesheet"databaseofover1billionelectronicequitiesandoptionstradingrecordsobtainedbytheDivisioninconnectionwithinvestigationsoverthelast20years.'Atthebeginningofvirtuallyallinvestigationsconcerningpossiblemarketabuse,Enforcementstaffsubmitbluesheetrequestsandloadtheresultanttradingdataintothebluesheetdatabase.PriortothedevelopmentoftheABAP,investigativestaffwerelimitedtosearchingtradingdatasuppliedinresponsetoparticularbluesheetrequests.Wecurrentlyaredevelopingtemplatesthatenablestafftosearchacrossthisaggregatedcollectionoftradingdata,conductingautomatedsearchesforsuspicioustradingpatternsandidentifyingrelationshipsandconnectionsamongmultipletradersandacrossmultiplesecurities.Thisprojectcangeneratesignificantenforcementleadsandinvestigativeentrypoints,includinginvestigativeleadsthatmayrelatebacktopriorinvestigationswheresuchconnectionscouldnotbeestablished.Whilestillintheprocessofbeingdeveloped,Enforcement'snewdataanalyticapproachesalreadyhaveledtosignificantinsidertradingenforcementactionsthatdidnotoriginatefromanSROreferral,informanttip,investorcomplaint,mediareport,orotherexternalsource.
4
Inaddition,Enforcement'snewAssetManagementUnitisresponsibleforanAberrationalPerformanceInquiryprojectusingrisk-basedanalyticscreatedbytheSEC'sDivisionofRisk,Strategy,andFinancialInnovationtoanalyzeperformancedataofthousandsofhedgefundadvisersandidentifycandidatesappropriateforexaminationorinvestigation.Aspartoftheevaluationprocess,stafffromtheUnitandtheSEC'sOfficeofComplianceInspectionsandExaminationsconsiderprivatefundsandadvisersthatalsohavebeensubjectsofSROreferrals.EveryregionalofficeoftheSEChasworkedonexaminationsand/orinvestigationsarisingfromthisinitiative.
3
Each"record"withinabluesheetrequestrepresentsalineoftradingdata:tickersymbol,date,purchaserorseller'sname,address,thetypeofexecution(buyorsell),accountnumber,brokername,MPIDnumberandrelateddata.
4
See,e.g.,SEC
v.
NicosAchilleasStephanou,RameshChakrapani,AchilleasStephanou,GeorgePaparrizosa/k/aGeorgiosPaparrizos,KonstantinosPaparrizos,Michael
G.
KoulouroudisandJosephContorinis,
CivilActionNo.09CV1043(S.D.N.Y.Feb.5,2009),
SEC
v.
JamesWSelfJr.andStephenR.Goldfield,
CivilActionNo.IO-CV-4430-ER(E.D.P.A.Sept.1,2010),http://www.sec.gov/litigationilitreleases/20IO/lr21638.htm;
SEC
v.
Jeffery
1.
TempleandBenedictMPastro,
CaseNo.10-CV-1058(D.Del.,December7,2010),http://www.sec.gov/litigation/litreleases/2010/lr2I765.htm;
SEC
v.
JonathanHollander,
CivilActionNo.II-CV-2885(S.D.N.Y.April28,2011),

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