The percentage of overall financial fraud cases brought by the SEC that involved broker-dealers rose last year, according to an agency official.
The percentage of overall financial fraud cases brought by the SEC that involved broker-dealers rose last year, according to an agency official.
Last year, 16% of the financial-fraud cases brought by the Securities and Exchange Commission involved broker-dealers, compared with just 9% in 2008, said Howard A. Scheck, chief accountant for the SEC’s Division of Enforcement. In 2007, 14% of cases involved broker-dealers.
“Basically, in the last two years, the commission has been focused on cases against broker-dealers due to Ponzi schemes,” said Mr. Scheck, who hosted a panel Tuesday at the Foundation for Accounting Education’s annual SEC conference in New York.
“We have specialized units looking at broker-dealers; we probably can continue to see more cases in that area as well,” he said.
The percentage of cases involving securities offerings also jumped — to 21% in 2009, from 18% in 2008, according to Mr. Scheck, who declined to disclose the total number of cases filed each year.
The SEC’s annual budget has climbed steadily 15 years, going just over the $1 billion mark this year. By 2015, that number is expected to reach $2.25 billion, he noted.
The increasing budget has led to the development of new enforcement units to cover a spectrum of areas, including asset management — specifically, hedge funds and private equities — municipal securities and market abuse. The agency has also formed a new whistle-blower office.
“The numbers have been trending down a bit in financial fraud cases,” Mr. Scheck said. He noted that market movement was one of the factors into the trend.
The SEC has been in hot pursuit of companies for a variety of accounting missteps. This month, it brought a lawsuit against Affiliated Computer Services Inc. for options backdating. The firm later settled the charges, consenting to a permanent injunction.
In August, the SEC pursued Navistar International Corp. and a slate of its executives, alleging that the firm improperly accounted for warranty reserves and deferred expenses. The executives later settled the charges.
The agency relies on internal regulatory referrals from its enforcement branches, but it also looks for clues coming from news reports, outlier industry performance and restatements of financial documents.
“If the accounting statements are restated, we look at why,” Mr. Scheck said. “We look at both disclosure and accounting.”
Mr. Scheck also explained that there’s a three-part cycle executives typically go through when committing fraud. First, there’s often pressure to meet an earnings estimate or avoid a debt covenant violation. That’s followed by rationalization of committing the fraud (“I’m getting pressure from the boss,” or, “We need to meet Street expectations.”)
And finally, executives act if an opportunity to commit the fraud is presented, Mr. Scheck noted.
In typical fraud cases, aggressive accounting policies and earnings forecasts are usually present. Clues to such activity turn up in evidence over the course of an investigation, Mr. Scheck said.
“A lot of the juicy stuff we get comes from e-mails,” he said. “Sometimes you get the flavor from the e-mails that there’s undue emphasis on achieving quarterly results.”
