President Barack Obama is setting up an investigative unit to crack down on financial fraud, but it remains to be seen whether the initiative has more political bark than substantive bite and how it will affect investment advisers.
“We'll establish a financial crimes unit of highly trained investigators to crack down on large-scale fraud and protect people's investments,” he said in his State of the Union speech last week.
The White House didn't re-spond to questions about the size of the unit, its budget or its specific agenda.
The “Blueprint for an America Built to Last,” released in conjunction with Mr. Obama's speech, said that the unit will work with U.S. attorneys under the direction of U.S. Attorney General Eric Holder.
Notionally, it is similar to the Financial Fraud Enforcement Task Force, which was established in November 2009 and involves more than 20 federal agencies and 94 U.S. attorney's offices.
Separately, Mr. Obama is creating a unit of federal prosecutors and state attorneys general within the task force to conduct investigations into mortgage-backed securities.
UNCLEAR GOALS
Experts said that it isn't clear exactly what Mr. Obama is seeking from the financial crimes unit. It could bolster the ability of U.S. attorneys to pursue market malfeasance by giving them more resources.
Currently, the majority of crimes prosecuted by those offices are related to drugs and immigration.
U.S. attorneys “lack the personnel to conduct a timely, thorough, efficient investigation of highly complex financial transactions and securitizations,” said Steve Scholes, a partner at McDermott Will & Emery LLP.
Mr. Obama's speech was delivered to Congress in a highly charged atmosphere with the national election looming in November. The Financial Crimes Unit fits neatly within one of his re-election themes: making the economy fairer and ensuring that “everyone plays by the same set of rules.”
“This is about the economic divide,” said Ellen Brotman, a partner at Montgomery McCracken Walker & Rhoads LLP and a former federal public defender. “There's a sense that powerful, rich people get away with things.”"BEING TOUGH'
Setting up the Financial Crimes Unit is a way for Mr. Obama to address that issue without having to get approval from Congress.
“There is a significant aspect of this which is political and is designed to give the impression of being tough on Wall Street,” Mr. Scholes said.
Some observers predict that it will have a significant impact on investment advisers. The Financial Crimes Unit could add momentum to the Securities and Exchange Commission's Asset Management Unit, a group in the Division of Enforcement created to strengthen the policing of advisers.
“There's going to be a lot more pressure on advisers and brokers,” said Ms. Brotman, who noted that federal interagency cooperation is increasing.
“The Department of Justice is going to be looking for an opportunity to make an example of someone,” she said. “There's no doubt in my mind that's going to be one of the industries they'll be looking at.”
Others aren't so sure.
“As the [White House] blueprint describes it, I wouldn't expect the Financial Crimes Unit to touch the vast majority of advisers,” Dan Barry, managing director of government relations and public policy for the Financial Planning Association, wrote in an e-mail. “It looks like it would focus on outright frauds of a major scale — market-level frauds, and maybe your Madoffs and Stanfords.”
Thomas Gorman, a partner at Dorsey & Whitney LLC, expects that the Financial Crimes Unit to focus on problems surrounding asset securitization.
“To the extent advisers and broker-dealers are involved in the marketing of some of these products, they may fall within the parameters of this group,” said Mr. Gorman, co-chairman of the American Bar Association's securities fraud subgroup in charge of white-collar crime.
Whether the initiative is effective depends on the approach it takes, according to Mr. Gorman.
It shouldn't second-guess cases that already have been pursued by the SEC or Justice Department, or the states, he said.
Rather, it should cull lessons learned and outline ways to improve financial fraud investigations, Mr. Gorman said.
“It comes sort of late in the day,” he said of the unit.
“These issues have been investigated many, many, many times at this point. The critical thing is to focus so that it's not rehashing what has been done,” Mr. Gorman said.
On its website, the SEC credits itself for bringing charges against 89 firms and individuals in cases related to the 2008 financial crisis and obtaining $1.97 billion in total penalties.
But the SEC's $285 million settlement with Citigroup Inc. in October involving allegations that the bank misled investors about mortgage-backed securities was vacated by U.S. District Judge Jed Rakoff for being too lenient.
The SEC is seeking legislation that would allow it to increase the civil penalties it can levy.
Mr. Obama also urged Congress to put more teeth into the Wall Street crackdown.
“Some financial firms violate major anti-fraud laws because there's no real penalty for being repeat offenders,” he said in the speech. “So pass legislation that makes the penalties for fraud count.”
mschoeff@investmentnews.com
