Fordham Law

Report shows drop in SEC criminal case referrals

Jim Cohen in The Top News section of Newsday, December 26, 2008

The Securities and Exchange Commission, the arm of the federal government that oversees Wall Street and is on the hot seat over Bernard Madoff's suspected $50-billion Ponzi scheme, has been referring fewer cases criminal cases to federal prosecutors, according to Department of Justice data compiled by a nonprofit group.

From fiscal 2004 to 2007, the SEC referred more than 70 percent fewer cases for prosecution nationwide and 81 percent fewer in Manhattan, where numerous investment houses are located, the data showed. The figures were compiled by the Transactional Records Access Clearinghouse, a nonprofit group known as TRAC that is affiliated with Syracuse University. It collects data and makes it available to the public.

Officials at the Department of Justice, which collects statistics from all federal prosecutors, routinely say they can't verify TRAC data. But independent federal court statistics also show that securities fraud indictments nationwide are down by 22 percent compared with fiscal year 2004 (TRAC shows a 25.9 percent drop) with some white-collar crime indictments down by more than 50 percent.

"There is no question the cop hasn't been on the beat," said J. Boyd Page, an attorney in Atlanta who represents investors in lawsuits over financial fraud.

Neither the SEC nor the Southern District U.S. attorney's office in Manhattan would comment about the TRAC data, which is subject to revision because of prosecutor reporting delays.

But some federal law enforcement officials said the SEC is spending more time working more closely with prosecutors instead of waiting to file formal referrals of criminal cases. In the Madoff case, the FBI and the Manhattan U.S. attorney's office jumped out with a criminal case. The SEC followed up with a companion civil case against Madoff.

However, even in the post-Enron era of stricter rules for corporate reporting of malfeasance, the level of federal white collar criminal cases, particularly those dealing with securities fraud, TRAC says, has dropped off from levels of only a few years ago.

This past week, SEC Chairman Christopher Cox said the agency apparently had "multiple failures" for 10 years in pursuing allegations against Madoff. However, for fiscal 2008, Cox noted that his agency brought 671 enforcement actions, many of them administrative and civil actions -- the second highest in its history. Some of the actions are relatively minor but some lead to large financial penalties and recoveries for investors.

It was the SEC and the U.S. attorney in Brooklyn that brought criminal and civil cases this past summer against two hedge fund managers at Bear Stearns who were indicted on a charge of defrauding investors.

But some defense attorneys are mystified about the data indicating that securities fraud prosecutions and SEC referrals have dropped off. Recent staff shortages and budget constraints are possible explanations, they said. The SEC has also taken a more deregulatory stance in recent years, Page said.

Fordham University law professor James Cohen said the SEC and federal prosecutors appear to be moving cautiously since the Enron case in charging companies with fraud and white collar crimes.

"Because entities [companies] in certain circumstances, if they are convicted, they go under," said Cohen, noting the collapse of the major accounting firm Arthur Andersen in 2002. The company was convicted in the aftermath of Enron. It won a reversal of that conviction from the U.S. Supreme Court in 2005, but it essentially remains out of business. Cohen also believes that while TRAC data may show lower numbers of securities fraud prosecutions, it may be that investigators are also using wire fraud laws to make securities cases although the statistics can't show that.

Robert Morvillo, a white-collar defense attorney in Manhattan, believes that local U.S. attorneys are doing their own investigations, without waiting for the SEC to serve them up.

"What I am seeing is the Southern District spending more time on internal [corporate] investigations, than cases from the SEC," said Morvillo's partner, Elkan Abramowitz.

Abramowitz thinks the reliance by prosecutors on the fruits of internal corporate investigations distorts the government investigative process because corporate officials have an interest in protecting the company.

Defense attorney Stanley Arkin thinks it is better not to rush to prosecute white-collar cases.