The Securities and Exchange Commission wants bad guys to know: ‘We’re watching’

Trader Talk

Scammers, fraudsters, insider traders, Ponzi schemers, stock spoofers — the Securities and Exchange Commission has seen it all.

I spent a day at SEC headquarters with the regulators Chairman Jay Clayton and the co-directors of the Division of Enforcement, Stephanie Avakian and Steven Peikin. The highlight was a visit to the Forensics Lab, a copper-lined room where the SEC extracts data from cell phones and computers from traders and others who may be engaged in suspicious activity.

Detecting illegal trading is a large part of the activities here. This year, for example, the SEC brought actions against 18 Chinese traders for manipulating the prices of over 3,000 stocks.

In January this year, the SEC charged nine defendants with hacking into the SEC Edgar database and extracting corporate announcements — including earnings announcements — before they were public.

They identified suspicious trading in advance of more than 150 corporate announcements. They analyzed IP addresses to establish connections among participants that seemed unrelated to each other.

The technology to do this type of analysis was not possible just a few years ago.

It’s not just trading fraud the SEC is monitoring — there were many actions against companies reporting false or inaccurate financial information.

For example, Facebook was hit with a $100 million civil fine because they described the misuse of user data as hypothetical when they knew user data had been misused.

Nissan was hit with a $15 million fine for false financial disclosures.

There were cases on fraud in digital assets and unlawful promotion of Initial Coin Offerings or ICOs.

The SEC has also brought many cases against mutual funds and advisory firms. There were cases against 95 investment firms that were forced to return $195 million to mutual fund investors for charging excessive fees, among other things.

They even get involved in cyber security issues. They forced the Options Clearing Corp. — the only clearing agency for exchange listed options contracts on equities — to pay a $15 million fine because it wasn’t doing adequate financial risk management and system security.

Altogether, the SEC brought 862 enforcement actions and obtained judgments and orders totaling more than $4.3 billion in disgorgement and penalties in fiscal 2019. And $1.2 billion has been returned to harmed investors.

The message from Clayton: “We want the bad guys to know we’re watching.”

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