Our New Financial Task Force
Posted by Andie Ryan Blog at 1/16/2010 8:14 PM 
Categories: uncategorized
Tags: financial task force government oversight fraud punitive deterrent oversight security Madoff taxpayers TSA Eric Holder FBI Justice Department financial fraud Executive Order FINRA. FinCEN Shakedown financial wrongdoing SEC case backlog new financial task force Attorney General Ponzi scheme financial crimes inaction Sarbanes-Oxley financial institutions regulatory
Categories: uncategorized
Tags: financial task force government oversight fraud punitive deterrent oversight security Madoff taxpayers TSA Eric Holder FBI Justice Department financial fraud Executive Order FINRA. FinCEN Shakedown financial wrongdoing SEC case backlog new financial task force Attorney General Ponzi scheme financial crimes inaction Sarbanes-Oxley financial institutions regulatory
I'm frequently asked if a financial fraud of the type described in SHAKEDOWN -- a massive insider trading scheme -- could happen. A couple of years ago, I would have thought it difficult to perpetrate such a fraud over an extended period of time. Post-Madoff, I wonder if that's naive, not just because determination and collusion go a long way in managing a successful long-term fraud, but because some of the regulators either seem to have lost their bearings, or don't have enough people on board to work a meaningful caseload.
Last November, a new financial task force was signed into creation by Executive Order. The New York Times picked up a Reuters piece on January 8 that quoted U.S. Attorney General Eric Holder explaining the new task force's responsibilities. The piece also mentions more than 5,000 cases of fraud at financial institutions pending investigation at the Justice Department, and 2,800 cases of mortgage fraud being investigated at the FBI.
7,800 cases sounds like a lot. 5,000 pending cases sounds like a lot.
I had to remind myself that there was no information about how many firms were named in these investigations, or how many investigations might still be related to Madoff. It could be 7,800 investigations about 7,800 distinct financial institutions, or 7,800 cases about half a dozen firms. There was no information about how many licensed securities reps or mortgage brokers might be involved, or in which states, or the nature of the complaints (suspected or actual fraud). All this information would be important to lend perspective to the reported numbers.
But the issue I can't stop thinking about is this: if we can't adequately resource the financial task forces and oversight efforts that are already established, long established, at the SEC, FINRA, FinCEN, the Justice Department, and the FBI, how will we resource another?
In relation to the Sarbanes-Oxley Act, we learned that it was hurriedly enacted to calm investor sentiment after Enron's failure, and that it could never do what people initially believed it would do -- namely, to prevent Enron-scale fraud. In relation to potential terrorists, we hear that meaningful cautions aren't sufficient enough to warrant restriction of flight privileges until those cautions can be verified. In relation to Madoff, we hear that, even after well-sourced warnings about financial wrongdoing, the regulators looked the other way. We hear about TSA employees leaving their posts, and mounted airport security cameras (that calm at least some traveler fear through their presence) not working.
So, on top of all this, when I hear about a 5,000 case backlog of financial investigations at Justice, and that the new financial task force will be led by the already-backlogged Justice, I start to think that what taxpayers are financing is inaction. I start to think that what oversight has come to mean is window dressing -- however well-intentioned it might be to ease our sentiment.
Is this what the new task force is fated to become -- a calming gesture?
Of course government oversight groups do a job, and some people have to be doing that job very well. Criminals are still arrested and prosecuted, and someone is doing something protective, every day. Most of the security cameras probably work. That's a good thing, and we don't want to forget that -- or the people doing these difficult jobs.
But there are too many lapses not to force some difficult questions, even if we keep a good perspective, and even if we acknowledge that the Administration is trying to do a positive thing.
Fighting financial crime is not a new concept. It's been going on since 1929. But we act as if every new instance is a standalone instead of part of a broader pattern of poor leadership and ethical lapse that is made worse by competitive earnings pressure. So let's take a look:
Last November, a new financial task force was signed into creation by Executive Order. The New York Times picked up a Reuters piece on January 8 that quoted U.S. Attorney General Eric Holder explaining the new task force's responsibilities. The piece also mentions more than 5,000 cases of fraud at financial institutions pending investigation at the Justice Department, and 2,800 cases of mortgage fraud being investigated at the FBI.
7,800 cases sounds like a lot. 5,000 pending cases sounds like a lot.
I had to remind myself that there was no information about how many firms were named in these investigations, or how many investigations might still be related to Madoff. It could be 7,800 investigations about 7,800 distinct financial institutions, or 7,800 cases about half a dozen firms. There was no information about how many licensed securities reps or mortgage brokers might be involved, or in which states, or the nature of the complaints (suspected or actual fraud). All this information would be important to lend perspective to the reported numbers.
But the issue I can't stop thinking about is this: if we can't adequately resource the financial task forces and oversight efforts that are already established, long established, at the SEC, FINRA, FinCEN, the Justice Department, and the FBI, how will we resource another?
In relation to the Sarbanes-Oxley Act, we learned that it was hurriedly enacted to calm investor sentiment after Enron's failure, and that it could never do what people initially believed it would do -- namely, to prevent Enron-scale fraud. In relation to potential terrorists, we hear that meaningful cautions aren't sufficient enough to warrant restriction of flight privileges until those cautions can be verified. In relation to Madoff, we hear that, even after well-sourced warnings about financial wrongdoing, the regulators looked the other way. We hear about TSA employees leaving their posts, and mounted airport security cameras (that calm at least some traveler fear through their presence) not working.
So, on top of all this, when I hear about a 5,000 case backlog of financial investigations at Justice, and that the new financial task force will be led by the already-backlogged Justice, I start to think that what taxpayers are financing is inaction. I start to think that what oversight has come to mean is window dressing -- however well-intentioned it might be to ease our sentiment.
Is this what the new task force is fated to become -- a calming gesture?
Of course government oversight groups do a job, and some people have to be doing that job very well. Criminals are still arrested and prosecuted, and someone is doing something protective, every day. Most of the security cameras probably work. That's a good thing, and we don't want to forget that -- or the people doing these difficult jobs.
But there are too many lapses not to force some difficult questions, even if we keep a good perspective, and even if we acknowledge that the Administration is trying to do a positive thing.
Fighting financial crime is not a new concept. It's been going on since 1929. But we act as if every new instance is a standalone instead of part of a broader pattern of poor leadership and ethical lapse that is made worse by competitive earnings pressure. So let's take a look:
- How will the duties of the new task force differ from those of the SEC, FINRA, FinCEN, Justice, and the FBI? What is new?
- Has anyone analyzed redundancy of duties with other groups? And I'm not talking about an elaborate two-year consulting engagement here -- just some straightforward, unbiased, roll-up-your-sleeves analysis that could be done in a month by someone knowledgeable.
- Is there a clear definition of the new task force's authority?
- What about accountability?
- Is there a clear definition of its limits?
- How will it be financed?
- How will it be resourced?
- How extensively will it be resourced?
- What will be the financial expertise of its staff?
- What will be the investigatory expertise of its staff?
- What will they be paid (we need real courage here)?
- Will the new task force have enforcement capability?
- What technology will it have at its disposal?
- How proactive will it be allowed to be?
- Will it have a confidential -- really confidential -- hotline?
- What will the penalty be for false reports to this task force?
- What range of action might the task force take on the basis of varying complaints? Is it documented, spelled-out?
- How will task force members document their responses and their decisions to respond or not respond to complaints of wrongdoing?
- Who will review these decisions for propriety and consistency?
- What new punitive deterrents will be in place -- ahead of the task force -- for companies and individuals perpetrating financial crimes?
Because the people on this new task force have to be at least as smart, equipped, technologically savvy, financed, and even motivated as those perpetrating the frauds.
Because the gloves have to come off when a former stock exchange Chairman is the one behind history's largest and longest-running Ponzi scheme.
Because the last thing we need when the next crisis blows is someone standing behind a podium sipping their water and telling us, "Well, we didn't think we had enough information to go in."
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