This morning, SEC Chairman Mary Schapiro testified before the Subcommittee on Financial Services and General Government in support of President Obama’s FY 2011 budget request of $1.258 billion for the SEC. Her testimony reiterated much of what has been said before on this blog and elsewhere about the SEC’s recent restructuring and developments, but also raised a number of items that have not been previously discussed in much detail.

Items of interest to me from today’s speech included:

• Schapiro said that in her first 12 months as Chairman, the SECs enforcement activity increased significantly compared to the previous year.  She said the agency had brought more than twice as many TROs and asset freezes; issued over twice as many formal orders of investigation; won $540 million more in disgorgement orders, while penalty orders more than doubled; and filed nearly 10 percent more actions overall, including nearly twice as many involving Ponzi schemes.
• In the area of examinations and oversight, Schapiro stated that “in response to ever-changing Wall Street practices and lessons learned from the Madoff fraud,” the SEC now requires examiners to routinely verify the existence of client assets with third party custodians, counterparties, and customers.
• Between FY 2005 and FY 2009, investments in new information technology systems for the SEC dropped by more than half.  New funds in FY 2010, however, have enabled the SEC to launch new initiatives, including centralizing into a single, searchable database the existing tips and complaints that were previously in multiple databases.
• This week, the SEC released for the first time a set of agency-wide policies and procedures to govern how employees should handle the tips they receive.
• Between FY 2005 and FY 2007, the SEC lost 10 percent of its employees due to flat budgets.
• The proposed FY 2011 budget of $1.258 billion would permit the SEC to hire an additional 374 professionals (10 percent increase over FY 2010), bringing the total number of staff to over 4,200. In the Enforcement area, this would allow for 130 new professionals, which Schapiro estimates would enable the SEC to open 75 additional inquiries, conduct 130 additional formal investigations, and file charges in 70 additional civil or administrative cases.
• The FY 2011 budget would also allow the SEC’s Enforcement Division to hire additional trial attorneys, increase administrative staff to free up the Division’s lawyers, and improve IT resources.

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Throughout the week over at Securities Docket, I highlight the most interesting columns and blog posts from around the web on the subjects of SEC enforcement and securities litigation. Here is a digest of my picks for the week ending March 12:

Should the U.S. Provide a Ponzi Scheme Bailout? (Peter Henning, DealBook)
DealBook | March 11, 2010
Many of the investors of Mr. Madoff and Mr. Stanford have been devastated, both financially and personally, and it is difficult to watch the federal government bail out companies that made questionable decisions while individuals are left to fend for themselves. But the fact that these firms received government support does not mean that every worthy claimant should receive the same treatment.

Ponzi schemes inflict enormous damage on those enticed to invest in them. In the end, however, it is hard to justify giving special compensation to the investors of Mr. Madoff and Mr. Stanford just because they lost significant amounts of money with little prospect of any recovery.

Harry Markopolos, SEC Chairman? (David Weidner, WSJ)
The Wall Street Journal | March 11, 2010
Mr. Markopolos also lacks support for a role as SEC Chairman. For as much as he’s lauded for his pursuit of Mr. Madoff, many find him a boor and, they argue he’d be overmatched in such a high position.

“He is what the commission needs only if the commission needs an emotionally unstable idiot savant,” said John Coffee, securities law professor at Columbia Law School. “You cannot be serious. He was right but that does not mean he will be right again.”

Book Review: No One Would Listen (Richard J. Tofel, WSJ)
The Wall Street Journal | March 9, 2010
A crusading legislator who had made a considerable reputation following up on whistleblower charges once told me that nearly all the whistleblowers she had met shared two qualities. First, they were onto something-that is, there was at least some truth to what they were saying. Second, they were “a little bit nuts.” The jacket of “No One Would Listen” identifies Harry Markopolos as “the Madoff Whistleblower.” He would seem to fit the pattern.

Please God, don’t allow a new generation of Gordon Gekkos (Chris Blackhurst, London Evening Standard)
London Evening Standard | March 8, 2010
When we look back at where it all went wrong, one of those we have to blame, surely, is Michael Douglas. That’s right, Douglas, the actor; not a nerdy banker coming up with some new-fangled financial instrument set to bring down his world.

It was Douglas who portrayed Gordon Gekko — an amalgam of the real-life arbitrageur Ivan Boesky, corporate raider Carl Icahn and junk bond king Michael Milken — in the 1987 movie Wall Street.

Madoff Losses Down from $65 Billion to $20 Billion (Doug Cornelius, Compliance Building)
Compliance Building | March 3, 2010
How do you value fraud?

When the Madoff ponzi scheme collapsed the claim was that there was $65 billion in losses. That was the total dollar value on the account statements given to investors. Of course, that number was fictional because there were not real assets behind those numbers.

The debut program of Securities Docket Radio is now available below! It features my interview with Sanjay Wadhwa, Deputy Chief of the SEC’s new Market Abuse Unit.

Please click below to listen to, or download, our discussion on Wadhwa’s new unit and investigations involving insider trading, specialist misconduct, offering fraud, and improper activities at hedge funds. We also discuss the significant reorganization now going on in the Division of Enforcement, and look inside the recent insider trading action brought against hedge fund giant Galleon, and the successful Reebok insider trading investigation.

Please click the link below to listen to Securities Docket Radio (or, if you wish to download the program, right-click the link below and select save):

Securities Docket Radio: Bruce Carton Interviews Sanjay Wadhwa of the SEC’s Market Abuse Unit

For the second time in less than six months, the SEC has filed a rare Regulation FD case. On Tuesday, the agency filed a case against Presstek, Inc. and its former CEO, Edward J. Marino. Is this a new area of emphasis for the SEC? It is probably too early to tell, but it is worth keeping an eye on. It is also interesting to note the SEC’s very different treatment of the companies involved in these two cases based on the company’s response to the alleged violations.

The Commission alleges that on September 28, 2006, Marino “selectively disclosed” material non-public information regarding Presstek’s financial performance during the third quarter of 2006 to a managing partner of a registered investment adviser. Within minutes, the SEC claims, the partner decided to sell all of the shares of Presstek stock his firm managed. The SEC alleges that contrary to Regulation FD, Presstek did not simultaneously disclose to the public the information provided by Marino to the partner.

Presstek has agreed to settle the SEC’s case by paying a $400,000 civil penalty and taking several other significant steps, including:

• revising its corporate communications policies and corporate governance principles;
• replacing its management team and appointing new independent board members; and
• creating a whistleblower’s hotline.

The case against Marino has not settled and is ongoing.

In September 2009, the SEC sued Christopher A. Black, the former CFO of American Commercial Lines, Inc., for allegedly aiding and abetting ACL’s violation of Regulation FD.  The complaint alleged that on June 11, 2007, ACL issued a press release projecting second quarter earnings in line with ACL’s first quarter earnings of approximately $.20 per share. Five days later, however, on Saturday, June 16, Black allegedly sent an e-mail from his home to the eight sell-side analysts who covered the company stating that ACL’s earnings per share for the second quarter “will likely be in the neighborhood of about a dime below that of the first quarter,” effectively cutting in half ACL’s second quarter earnings guidance.

The SEC alleged that the resulting analysts’ reports triggered a nearly 10% drop in ACL’s stock price on Monday, June 18, the first trading day after Black’s e-mail to analysts. Black agreed to settle the case by paying a $25,000 penalty.

Unlike in the Presstek case, however, the SEC did not bring an enforcement action against ACL, noting in its litigation release that prior to the violation, ACL “cultivated an environment of compliance” by providing training regarding the requirements of Regulation FD and by adopting policies that implemented controls to prevent violations. Moreover, the SEC stated that once the illegal disclosure was discovered by ACL, it promptly and publicly disclosed the information by filing a Form 8-K with the Commission the same day, and self-reported the violation to the SEC the day after it was discovered.

In the UK, the FSA continues to make it clear that it will aggressively pursue insider trading through criminal prosecutions. Today, for the third time in less than a year, the FSA obtained a conviction in an insider trading case. The jury trial that concluded today was against Malcolm Calvert, a former partner at JPMorgan Chase’s Cazenove unit. Bloomberg reports that Calvert was convicted of five counts of insider dealing by a London jury, and faces a maximum penalty of seven years in jail when he is sentenced tomorrow.

Prosecutors alleged that Calvert obtained inside information from someone at Cazenove, but they didn’t know who Calvert’s source was. They further alleged that Calvert tipped a friend who made a profit of 280,000 pounds, two-thirds of which he gave to Calvert in cash.

The FSA secured its first criminal conviction for insider dealing in March 2009, in its case against Christopher McQuoid, former general counsel of TTP Communications, and his father-in-law, James Melbourne. In November 2009, the FSA obtained convictions in a second case when Neel Uberoi and his son, Matthew, were found guilty of 12 counts of insider dealing.

Surely there is a special place in Hell for those who would try to defraud and further victimize Madoff victims?

The Securities Investor Protection Corporation announced today that it is alerting international regulators about a fictitious organization that has created a deceiving web site that looks like SIPC’s in an apparent attempt to target Madoff victims.

The entity in question–the so-called “International Security Investor Protection Corporation (I-SIPC.com)”–has a website that appears to clone many pages and features of the real SIPC web site, even closely copying the SIPC logo (see the comparison above). The ISIPC web site also copies entire pages from the SIPC web site, such as the “How ISIPC Protects Investors” discussion (in this case without even bothering to change the name in the copied text to ISIPC, as it probably intended to do). SIPC warns that ISIPC is soliciting Madoff victims to submit claims, which SIPC believes could result in “phishing” or other identify theft problems.

Among other things, SIPC states that ISIPC falsely claims to have collaborated with Interpol to recover $1.3 billion in Madoff money from a hideout in Malaysia. SIPC President Stephen Harbeck stated that SIPC knows that “this bogus group is already attempting to obtain funds and confidential financial information from investors in the U.S. SIPC wants to be as clear as possible that Madoff victims and other investors should not share any personal financial information via this Web site or rely upon it as an information source. We intend to use every available means to shut down this illicit operation.”

Lerach. Is Back.

Say it slowly and it (a) sounds dramatic and (b) rhymes. Actually, though, Bill Lerach is not really “back.” He has been disbarred following his felony conviction in connection with a class action kickback scheme and is most definitely in “early retirement,” as he puts it.

But if Lerach is not back, he is at least out. He was released from federal custody this week after serving his sentence (he had already been under home confinement since late 2009), and is now once again a free man.

Reuters reports that Lerach says he will not miss his former “frenetic life of a litigator,” and hopes to now teach and work with progressive economic groups to brainstorm public policy. He also was adamant that there “will be another financial fraud wave if serious changes aren’t made. We keep repeating the same mistakes. There is no real legal or economic accountability of the people on Wall Street.”

Lerach says he watched the collapse of Lehman Brothers and the ensuing financial crisis unfold on CNBC while serving time in an Arizona correctional facility. He believes we have a “compensation system of corporate executives and bank executives that really encourages them to take extraordinary risks,” but without legal accountability to the government, shareholders or the corporation.”

Lerach also lamented that America has “lost its appetite” for private civil litigation. “It’s been viewed as too expensive and too inefficient a way to police corporate behavior or compensate plaintiffs. The shame is that nothing will replace it.”

Throughout the week over at Securities Docket, I highlight the most interesting columns and blog posts from around the web on the subjects of SEC enforcement and securities litigation. Here is a digest of my picks for the week ending March 5:

Madoff Losses Down from $65 Billion to $20 Billion (Doug Cornelius, Compliance Building)
Compliance Building | March 3, 2010
How do you value fraud? When the Madoff ponzi scheme collapsed the claim was that there was $65 billion in losses. That was the total dollar value on the account statements given to investors. Of course, that number was fictional because there were not real assets behind those numbers.

A Wall Street Witch Hunt (William D. Cohan, NYT Opinionator Blog)
The New York Times | March 5, 2010
As scary as the events of September 2008 must have been for Lloyd Blankfein and Goldman Sachs, they don’t hold a candle to the abject fear that raced through the firm some 21 years earlier when, on the morning of Feb. 12, 1987, a United States marshal, Thomas Doonan, entered the Goldman building at 85 Broad Street in search of a senior partner, Robert Freeman. When Freeman walked in, Doonan closed the door and pulled down the shades. Doonan, who at first mispronounced Freeman’s name, told him he was under arrest for insider trading and a breach of federal securities laws.

Questions For Harry Markopolos - Math Is Hard (Deborah Solomon, NY Times)
The New York Times | March 5, 2010
The NYT’s Deborah Solomon interviews Madoff whistle blower Harry Markopolos, who starts by saying the SEC “wasn’t even asleep at the switch; they were comatose. They didn’t respond to heat and light, much less evidence of wrongdoing. They were not engaged in the fight.”

Second Acts (Dimitra Kessenides, American Lawyer)
American Lawyer | March 5, 2010
As Robert Khuzami reaches his one-year anniversary on the job, Congress, investors, and the industry his agency regulates are waiting to see whether structural changes and a beefed-up docket-enforcement actions are up under Khuzami–will lead to real change. Will there be more significant cases like the Galleon investigation, conducted in tandem with the U.S. Department of Justice? Or will there will be more embarrassments, such as the rebuke from Jed Rakoff, the Manhattan district court judge who scuttled the agency’s initial settlement with Bank of America Corporation?

Let the S.E.C. Help Itself (Joel Seligman, NY Times)
The New York Times | March 2, 2010
What is the most effective way to prevent another financial scandal on the scale of Allen Stanford’s alleged securities fraud or Bernard Madoff’s Ponzi scheme? No other single reform would accomplish more than allowing the Securities and Exchange Commission - the federal agency responsible for full disclosure of corporate information and the regulation of stock exchanges, broker-dealers and investment advisers - to fund itself through corporate fees.

You read it here first. Next week, I will team up with Legal Talk Network to produce the “pilot” episode of Securities Docket Radio. My guest will be a senior SEC official from the Enforcement Division’s new Market Abuse unit. I’ll leave you in suspense briefly as to who it is, but you’ll be able to listen to and download the free podcast here, on iTunes, and elsewhere next week. Stay tuned for more details….