SEC Enforcement—“How Quaint”

SEC, Center for Risk and Quantitative Analytics, CRQA, quantitative analysis, quaints

With CRQA, the SEC Stays One Step Ahead of Fraudsters

One of the first things that SEC Chair Mary Jo White did when she assumed leadership of the agency in April 2013 was to order development of an analytics division to counter the technological edge that Wall Street traders seemed to have over SEC regulators. The realization that a lack of mathematicians, quantitative analysts, and assorted “techies” to assist with regulatory enforcement was hampering SEC efforts led to the formation of the Center for Risk and Quantitative Analytics (CRQA). After three years of operation, there are both skeptics and advocates weighing in with differing views of the CRQA, all of which lead us to examine: has the CRQA been a success?

Data from a New Perspective

Historically, the SEC was known for being staffed with an army of lawyers ready to hold Wall Street accountable for any missteps in adherence to the Securities and Exchange Act. In that regard, it was well-equipped to wrest fines, sanctions, and suspensions out of defendants in the courtroom or in the venue of administrative proceedings. But as traders became more tech-savvy, lawyers were simply not the right professionals to deal with the new “art of the trade.” Although SEC regulators certainly engaged in computer modeling to try to catch violators, and there existed the forerunner of the CRQA known as the Office of Market Intelligence, new methods of reviewing trade data became necessary. Lori Walsh, chief of the CRQA, noted shortly after the center was organized: “When you look at data in different ways, you see new things,” adding, “We have been able to identify cases based on the use of these analytical tools that we wouldn’t have been able to identify otherwise.”

Enter the “Quaints”

To bolster the investigative function of the SEC before referring suspect trade data reports to the enforcement division, the CRQA hired a team of quantitative analysts—known as “quaints”—skilled in sophisticated data analytics. As a result, hundreds of investment firms as well as individuals that might not previously have been placed under the regulatory microscope were flagged for forwarding to enforcement investigators. In fact, among the major impetuses for creating CRQA was the Madoff securities fraud scandal of 2008 that stayed under the SEC radar for years, despite what were later deemed to be numerous missed data warning bells.

Hedging on Success

An SEC-developed algorithm was used to analyze wire transfers and bank records that ultimately disclosed a $500 million investor fraud scheme operating out of Connecticut. The hedge fund manager running the operation was found guilty, and the SEC enforcement division was able to recover $230 million for investors from an offshore account. In an address before the New York University School of Law last month, Chair White praised that and other enforcement successes as being due to the CRQA: “In the last few years, these efforts have resulted in at least nine insider trading cases originating solely from leads generated by these types of tools, many others in the pipeline, and dozens of other cases being expanded using these tools to identify additional unlawful trading.”

But while critics contend that this scorecard merely shows that very few of the leads it generates end up being pursued by SEC enforcement regulators, as more and more data become accessible from bank accounts and numerous new digitized regulatory filings required by law, the CRQA’s “quaint” approach should enable the SEC to stay one step ahead of financial criminals and fraudsters.

After receiving his Juris Doctor degree from The John Marshall Law School in Chicago, Mr. Brochin served as an Administrative Law Judge with the Illinois Department of Labor for six years. Following that position, he was a solo practitioner in the fields of Real Estate Law and Commercial Contracts Transactions for twenty years. In 2003, he was recruited to head an outsource title research company in Israel, and since 2007, he has engaged in litigation support for several high profile cases. He has taught Business Law as a faculty member of the Jerusalem College of Technology, and for the past three years, he has authored a wide variety of legal White Papers and timely legal articles as a professional legal content writer.

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