SEC shutdown opens the door for fraud

Bad actors will win, and investors will lose during government shutdown

Jan 10, 2019 @ 10:56 am

By Bruce Kelly

Investment fraud is on the rise,and the Securities and Exchange Commission, which is supposed to be Wall Street's cop on the beat, is closed for business.

Due to the partial shutdown of the federal government, the SEC is currently working with a skeleton crew and can't do its essential job: protecting investors and markets.

"Effective Thursday, Dec. 27 and until further notice, the agency will have a very limited number of staff members available," according to the SEC's website. "The SEC has staff available to respond to emergency situations involving market integrity and investor protection, including law enforcement."

Such a statement fails to instill confidence. Investors are clearly less protected than they were before the work stoppage.

The SEC's current state is dangerous for investors and bad news for the investment advice industry, which took a severe blow to its reputation after the massive Bernie Madoff Ponzi scheme and is still laboring under the shadow of his titanic fraud.

The government shutdown means that Ponzi schemes the SEC was about to bust will remain open for business, continuing to harm the elderly. The government shutdown means SEC lawsuits against financial institutions committing fraud won't be filed. The government shutdown means the bad guys are getting a pass.

The timing could not be worse. As this column noted in October, big-time investment fraud is back.

Just last month, the SEC said it charged 13 individuals, including a former financial journalist, with unlawfully selling the securities of Woodbridge Group of Companies, a $1.2 billion Ponzi scheme that collapsed in December 2017 and filed for bankruptcy. In November, the SEC fined the former CEO of Woodbridge, Robert Shapiro, $120 million to settle allegations that he defrauded investors in the scheme.

And the SEC and the U.S. Attorney's office in July said they were investigating an alleged fraud called 1 Global Capital, a company that raised $283 million from investors to make short-term business loans. The money was raised, at least in part, through a network of unregistered brokers and financial advisers.

(Please note, the 1 Global Capital loan business is a separate, unrelated company from 1st Global Capital Corp., an independent broker-dealer based in Dallas.)

A call Wednesday afternoon to the SEC's press office seeking comment was not returned.

The government shutdown, which started on Dec. 22, apparently had an almost immediate impact on the SEC. According to the agency's website, it has not filed an enforcement action against a firm or individual since Dec. 26.

Rep. Maxine Waters, D-CA, chairwoman of the House Committee on Financial Services and not a favorite of many who work in the financial services industry, said on Wednesday that the government closure opened the door for bad actors looking to commit fraud.

"This president has all but closed the doors of the SEC, furloughing 94% of the agency and essentially providing fraudsters and schemers with a free pass to swindle investors and small businesses," Ms. Waters said in a statement. "With such a skeleton crew of less than 300 staff, the SEC cannot possibly oversee the activities of the over 26,000 registered entities, such as investment advisers, broker-dealers and stock exchanges."

She added: "Worse, the SEC is unable to hold bad actors accountable through most enforcement actions, preventing harmed investors from obtaining relief."

If the SEC can get back to work over the next week or two, the risk to the public would be real but not as serious if it remains closed for the next several months, one lawyer said.

"If the SEC is shut down for several months, there will be serious problems in the securities marketplace," said Brandon Reif, managing partner of his eponymous law firm. "You will see a lot of fraud and the commission won't have the time or resources to investigate. The remaining employees won't be able to pick up that workload. It's very dangerous to not have the watchdog keeping an eye on the securities markets."

Wall Street's cop on the beat right now is MIA. If the SEC's staff does not get back to work soon, investors and the financial advice industry are certain to suffer. A government shutdown, particularly one that goes on for months, has only one result.

The bad guys win.


What do you think?

View comments

Upcoming event

Nov 13


Top Advisory Firm Summit

Formerly known as the Best Practices Workshop, this new one-day conference will also include content from the Best Places to Work event!The Top Advisory Firm Summit will provide CEOs, COOs, CTOs, CMOs, and Managing Partners from the... Learn more

Most watched


Finding innovation in your firm

Adam Holt of AssetMap explains how advisers understand they need to grow, but great innovation may be lurking right under your nose.


Finding your edge from Tony Robbins

Guru Tony Robbins has helped a lot of people, but armed with his psychology Financial Advisor Josh Nelson has helped his practice soar.

Latest news & opinion

This strategy can double your estate-tax exemption

'Portability' allows a surviving spouse to tack the decedent's exemption on to his or her own. Despite the higher threshold for paying estate taxes in the 2017 tax law, experts recommend filing for the benefit.

Couple in Morgan Stanley advisory account wins $519,000 arb case over unsuitable investments

Plaintiff's lawyer says junk bonds, futures contracts and derivatives were inappropriate for his clients.

The growth of factor-based investing

Advisers are making decisions about clients' portfolios by using the same characteristics that govern factor-based ETFs.

Finra makes its list to target hundreds of rogue individuals

The regulator sees patterns in the behavior and disclosures of high-risk brokers.

LTC insurer offering co-pays to blunt soaring premium increases

John Hancock policyholders would get a discount on their premium in return for agreeing to pay a bigger portion of their claims in the future.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print