Senate Judiciary Committee
“Investigating and Prosecuting Financial Fraud after the Fraud Enforcement and Recovery Act”
September 22, 2010
Members Present:
Ted Kaufman (D-DE), Amy Klobuchar (DFL-MN), Al Franken (DFL-MN), Chuck Grassley (R-IA)
Witnesses:
The Honorable Lanny A. Breuer, Assistant Attorney General, U.S. Department of Justice
Robert S. Khuzami, Director, Division of Enforcement, Securities and Exchange Commission
Kevin L. Perkins, Assistant Director, Federal Bureau of Investigation
Opening Statements:
Kaufman: I want to explore whether the resources provided under the Fraud Enforcement and Recovery
Act (FERA) are being used efficiently in these three agencies. We need to know if there are legislative
reforms that we can pass that would make it harder for people to use fraudulent financial products. In
the last year or so, we’ve been learning more and more about the wide range of conduct that
contributed to the financial collapse. Much of that behavior was not criminal, but I remain convinced
that there was also serious criminal behavior as well. We need to look at the difference between
criminal behavior and behavior that was misguided. Criminals on Wall Street must be held accountable.
Things have improved since passage of this Act last year, but despite the new resources and renewed
interest, we still haven’t achieved the number of prosecutions that I think we should have. I offered an
amendment to the Dodd-Frank Act that would require broker-dealers to be held to the same standard
of care as investment advisers, but it did not pass. What laws do we need to make sure we focus on
right and wrong, fairness and unfairness?
Grassley: It’s important to know how implementation of this legislation is going. I’m interested in
hearing how it has helped them prosecute criminals and help bring people to justice. I have questions
about how the SEC is implementing recommendations from the IG regarding the Madoff and Stanford
schemes.
Highlights from Witness Testimony:
Breuer: FERA and the Dodd-Frank Act have provided our investigators and prosecutors with the
resources and tools needed to combat financial fraud. Since the passage of FERA, we have reevaluated
the manner in which we prosecute financial fraud, and we have reformed our enforcement efforts. We
have prosecuted thousands of financial criminals, and we have sought stiff sentences for their crimes.
Our agents around the country uncover and investigate investment fraud every week. Our efforts to
combat financial fraud have also targeted high level executives in the most sophisticated of frauds.
Financial fraud has devastating effects on our citizens, and it demands our full attention. We have made
this fight a priority, and we will continue to do so.
Khuzami: While there is much to be done, we have achieved significant results of improvements at the
SEC. We are focused on the future in initiatives designed to identify emerging threats in our markets.
We are using risk-based assessments to improve our efforts as well. We’re engaged in other reforms,
streamlining our management structure, and integrating the new authority given to us under DoddFrank.
Perkins: The FBI has continued to uncover significant financial frauds. The wave of mortgage fraud
shows no signs of slowing. We are continuing to develop the Financial Fraud Intelligence Center that
provides tactical analysis to identify ongoing financial fraud schemes. Our partnerships with these other
agencies are vital to our success.
Questions and Answers:
Kaufman: What has changed about how you identify high level targets? Khuzami: The fundamental
tools that have always been in place are still the ones we use. We have developed a cooperation
program where we offer reduced sentences for insiders who come forward and agree to provide inside
information. Perkins: Just looking at our resource levels, there has been a notable increase in all of our
four major priority areas. We’ve had to prioritize and shift our resources away from our lower priority
areas. Breuer: One of the strategies we’re employing is the use of wiretaps. We’ve tripled the number
of people who review wiretaps. That’s a very real, direct result. We’ve cut down the time it takes to
review these.
Grassley: It’s shocking how these frauds went on for years with the Madoff and Stanford schemes even
after the SEC received numerous complaints and reports. The IG’s report recommended that the SEC
take appropriate action with employees who are still at the SEC who failed to do their jobs in these
cases. Has this occurred? Khuzami: I understand that those decisions will be made as soon as the case
is completed, and with respect to the Stanford case, I believe that process is already underway with the
IG. I don’t know if there are restrictions about what we can disclose about specific actions. Grassley:
Regarding the SEC’s use of whistleblower provisions, the report found that there have been very few
payments to whistleblowers, and that the program was not well-designed and not successful. Under the
Dodd-Frank Act, improvements to this were passed. Do you believe these will increase the productivity
in finding financial fraud? Khuzami: There is no doubt that providing incentives will help people come
forward. We just have to figure out how to get it right. Grassley: Since the authority has previously not
been used very much, how can we be assured they will use it now? Khuzami: We have been trying very
hard to spread information about this program so that we can get as many people as possible to come
forward.
Klobuchar: What are some of the lessons you’ve learned? Breuer: We know we need to employ
aggressive techniques in the areas of white collar financial frauds. We need to seek stringent prison
terms. All of this works. The Financial Fraud Enforcement Task Force really works because it allows us
to work together, even with state district attorneys and state AGs, and that’s really what we need. We
have to put enormous resources in some of the most complicated cases. I know this can cause some
frustration to the public. Khuzami: Our penalty funds and our Fair Fund money are up considerably, and
I think those reflect enhanced enforcement. I’m proud that while we’ve been able to increase the
statistics, we’ve also been able to take on the most complicated cases. Klobuchar: Are you seeing
schemes as a result of the Gulf oil spill? Perkins: We are looking into this issue. We have the National
Disaster Fraud Center on campus at LSU. We’re trying to prevent it ahead of time and raise public
awareness. We’re making it known that there will be no tolerance for fraud.
Kaufman: How can we distinguish the criminal behavior from other behavior? Breuer: The main point
about all of the cases we’ve brought is that those people made materially false statements. They told
investors one thing but knew the truth to be something else. That’s what we look for. Kaufman: I don’t
think anyone can sell something and at the same time buy insurance that the product is going to fail.
That would be a conflict of interest and would be criminal behavior. That’s what we’re trying to get at
here in the situation with securities. How will a law imposing a fiduciary duty on broker-dealers improve
the situation? Khuzami: That is an area that’s being studied by the SEC so I don’t know if it’s
appropriate for me to comment right now. Kaufman: I think the lack of fiduciary duty is the “get out of
jail free” card in this situation. Do you agree? Breuer: We would be affected by whatever the SEC
decides to do in this area. They do have more expertise in that area than we do, so we’d be guided by
them. Kaufman: Is there a better way to regulate disclosure? Khuzami: Some of these concerns are
under review now, so we’d have to give them some thought.