OIG Uncovers SEC Enforcement Issues in Securities Fraud

The handling of securities fraud complaints by Securities and Exchange Commission (SEC) staff leaves room for improvement, according to a report by the Office of the Inspector General (OIG). The report (available to download here) involves a recent review of the SEC’s enforcement department, which investigates and prosecutes violations of federal securities laws. Violations under the enforcement’s jurisdiction include fraudulent securities offerings and other market manipulations. The OIG’s review, prompted by the uncovering of a the multi-billion-dollar Ponzi scheme conducted by Bernard Madoff and involving securities fraud, uncovered a general response from enforcement staff that SEC lacks guidance on how to analyze complaints. The staffers assigned to investigate the Madoff case were inexperienced, for example, and failed to exercise due diligence or ask assistance from other offices and divisions. In a survey to enforcement staff members, respondents indicated the degree of impartiality required to perform their duties was unclear. They also expressed concern over case-handling processes and working relationships within the department. Other respondents indicated the degree of impartiality required to perform their duties and the communication of priorities by management were both unclear, according to OIG. “Priorities change like the flavor of the day,” one respondent said in comments OIG included in its report. “Whatever’s ‘hot in the news’ becomes our priority. Often it feels like we’re the dog chasing its own tail.” The OIG recommended 21 measures to strengthen management control, including establishing formal guidance for handling complaints, reviewing and testing effectiveness of policies and procedures on an annual basis and forming a new — or using an existing — working group to review staff concerns over case-handling procedures and inter-departmental relationships. The director of enforcement at the SEC, Robert Khuzami, said in a response letter dated September 24 that the department will implement the recommendations as part of an ongoing effort to develop a more effective program. Write to Diana Golobay.

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