Is The SEC Intercepting Your Instant Messages?
In the aftermath of Galleon, the SEC is aggressively ramping up its enforcement techniques, and while we all know that the regulators, in "joint venture" with the Justice Department, are likely eavesdropping on every single telephonic conversation originating or terminating in a financial firm, it is likely that Mary Schapiro has finally realized that some time in the 90's a thing called instant messenger became quite popular and that the bulk of traders and analysts converse not so much via phone but by Bloomberg MSG and IM blasts, as well as via all sorts of other discrete electronic communication tools. And this may be precisely what Robert Khuzami is targeting now as the Galleon net continues to expand ever wider to even what were formerly considered untouchable stalwarts of the hedge fund community.
An article by Securities Industry News highlights the desire of the SEC to finally, with much pomp and circumstance, enter the 21st century.
The use of wiretaps and recordings of conversations to help underpin
the insider trading case against the Galleon Group hedge fund struck
legal experts as unusual, for an investigation involving the Securities
and Exchange Commission.
“It is unusual,’’ said Robert S. Khuzami, the director of
enforcement at the S.E.C., at a discussion of hedge fund regulation at
the Practising Law Institute in New York Monday. But, a year from now,
“I hope it’s more common.’’
And here is why AOL may need much more than just a rebranding campaign to have its instant messenger product be used again on Wall Street:
But don’t be surprised if more creative techniques involving the
capturing of electronic messages or other evidence are used as the
S.E.C. tries to step up its game, in the wake of the
multibillion-dollar Ponzi scheme run by Bernard L. Madoff and other
fallout of the two-year-old financial crisis. Prosecutors built their
case against former Bear Stearns Cos. hedge-fund mangers Ralph Cioffi
and Matthew Tannin around e-mail messages.
Aside from merely going thru millions of lines of chit chat interspersed with some "hot tips" here and there, the SEC seems to be really revamping its operations.
While the “very large majority of (hedge) funds run their operations in
a lawful and proper manner,’’ the commission’s enforcement division has
set up three national groups to investigate possible violations in:
- Asset Management – Focusing on issues ranging from disclosure to
misappropriation involving investment advisors, investment companies,
hedge funds and private equity funds.
- Structured and New Products – Focusing on the lack of
transparency in complex derivatives and financial products, with
particular attention paid to new instruments.
- Market Abuse – Focusing on large-scale market abuses and manipulation
perpetrated by institutional investors and market professionals.
And one last concept that the SEC seems to be taking offense at, are the marking shenanigans that occur on a daily basis through practically all buy (and sell)-side firms.
Monday, [Khuzami] also noted that “real-time records” will likely be looked
for, in cases involving how investment firms come to value assets they
This may actually be one of the biggest benefits of SEC's overhaul as it would prevent such SNAFU's as the Goldman-AIG CDO marking saga, where the two firms differed over the value of CDO collateral by over 20%. When you are talking billions in notional, this action may just prevent Goldman from brandishing its too big to fail colors any time it disagrees with a potentially risky counterparty over collateral valuation in the $25 trillion CDS market.