New SEC chief cranks up heat with indictment

Aggressive actions indicate crackdown on Wall Street

First the Securities and Exchange Commission rejected a settlement with a high-flying hedge fund manager, Philip A. Falcone. Then it filed civil charges against another billionaire trader, Steven A. Cohen. By the end of the day July 19, it had accused one of the nation’s largest cities, Miami, of securities fraud.

It was a busy 24 hours for the SEC, the federal regulator once blamed for missing the warning signs of the financial crisis and the vast Ponzi scheme orchestrated by Bernard L. Madoff.

The aggressive enforcement moves by federal regulators continued last week when on Thursday, SAC Capital Advisors - the trading firm founded by Cohen - was indicted on criminal charges it allowed an unprecedented insider-trading scheme involving more than 20 companies and dating to 1999 that reaped millions of dollars in illicit profit,according to prosecutors.

Appearing in federal court Friday in Manhattan, attorneys for the Stamford, Conn.-based hedge fund entered an innocent plea on behalf of the company to the wire and securities fraud charges.

The flurry of enforcement actions appear to signal that the SEC is striking a harder line with Wall Street under its new chairman, Mary Jo White. While it is still early in her tenure, and with the agency facing lingering criticism for its close ties to Wall Street, White has taken several steps to crack down on financial fraud.

“They’re now demonstrating an aggressiveness that is highly unusual,” said Thomas A. Sporkin, who spent nearly 20 years in the SEC’s enforcement unit until last year, when he moved to the law firm Buckley Sandler. “It’s rare to see a day like today.”

When White was nominated in January, some politicians and consumer groups expressed concerns about her connections to Wall Street. A former federal prosecutor turned defense lawyer, White has repeatedly spun through the revolving door connecting government and private practice. During her confirmation, several questioned whether White, who spent the past decade representing big banks like JPMorgan Chase and UBS, could have conflicts of interest.

Her recent actions have started to assuage some concerns. White has moved to address a central criticism of the agency: that it allows defendants to neither “admit nor deny” wrongdoing when reaching settlements. The leaders of the SEC enforcement unit detailed the policy shift in a memo last month, saying there might be cases that “justify requiring the defendant’s admission of allegations in our complaint or other acknowledgment of the alleged misconduct as part of any settlement.”

“It’s welcome news for the American people desperate for a tougher SEC,” said Dennis M. Kelleher, who runs Better Markets, an advocacy group critical of Wall Street.

He said, however, that the agency still had a high bar to clear before proving it could be a tough enforcer, referring to the cases involving Falcone and Cohen.

“Two hedge fund cases are good but not good enough,” he said.

In the earlier civil filing, filed July 19, Cohen was accused by the SEC of failing to properly supervise employees to prevent insider trading at the firm.

Cohen has denied any wrongdoing.

For a time, the SEC was questioning whether to sanction Cohen. The agency has spent nearly a decade investigating his hedge fund, SAC Capital Advisors, and even brought charges against several employees. But Cohen was not accused of wrongdoing. That changed July 19.

The action, filed as an administrative proceeding at the agency rather than as a lawsuit in federal court, delivers a serious blow to Cohen. The agency is seeking to bar him from overseeing outside investor funds, a death knell to a hedge fund manager.

It is unusual for the SEC to pursue a case against someone of Cohen’s stature without formally accusing him of insider trading or fraud. The charge of failing to properly supervise is similar to what other regulators have done in a lawsuit against Jon S. Corzine, who led MF Global during the brokerage firm’s collapse two years ago.

In its charging document July 19, the SEC says Cohen failed to halt two of his portfolio managers from trading on confidential information. The two SAC employees, who face criminal charges, were swept up in a broad federal investigation into insider trading.

One of the portfolio managers, Mathew Martoma, is accused of improperly acting on data about a clinical drug trial in 2008.

The other, Michael S. Steinberg, is accused of trading on confidential information about Dell’s financial performance that same year.

Both men have denied the charges and face separate trials that begin in November. An SAC spokesman said that the SEC’s action had no merit.

“Steve Cohen acted appropriately at all times and will fight this charge vigorously,” the spokesman said.

The case against Miami came just hours after the action against Cohen was announced. The SEC accused the city of giving misleading information about its finances to investors in 2009 in an effort to make its municipal bonds more attractive.

The agency also said the city broke a cease-and-desist order it signed in 2003 after facing similar charges.

George Canellos, co-director of the SEC’s enforcement unit, said in a statement that the city’s conduct was “all the more appalling and unacceptable” because of the earlier problems.

A lawyer for Miami, Ivan Harris, said the city would fight the charges in court.

The preliminary settlement with Falcone had been collapsing for weeks, people close to the agency said, as White and the agency’s other commissioners questioned whether it was too lax. On July 18, the agency’s commissioners rejected the settlement, which happens only once or twice a year.

Moments later, the SEC notified Falcone and his hedge fund, Harbinger Capital Partners, that the agency had rejected “the previously disclosed agreement in principle,” according to a public filing his company made July 19. The charges stemmed from accusations that Falcone had manipulated the market, used hedge fund assets to pay his own taxes and secretly favored select customers at the expense of others.

Business, Pages 68 on 07/28/2013

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