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Wednesday, 04/17/2013 10:54:43 AM

Wednesday, April 17, 2013 10:54:43 AM

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Suits Against Gatekeepers Likely In Microcap Arena, Bustillo Says

2013-04-12 22:30:24.589 GMT

Suits Against Gatekeepers Likely In Microcap Arena, Bustillo Says

By Phyllis Diamond

(BNA) -- In its effort to wipe out microcap fraud, the Securities and Exchange Commission is focusing its enforcement efforts on gatekeepers such as lawyers, analysts, and promoters, Eric Bustillo, director of the commission's Miami Regional Office, told BNA March 28.

Putting gatekeepers who help facilitate such frauds out of business helps investors and is a good use of the agency's limited enforcement resources, Bustillo said.

In an interview, Bustillo also discussed why his region, especially south Florida, historically has seen more than its share of boiler-room, offering fraud, and manipulation schemes, among other topics.

Getting Ahead of the Curve

“In the microcap area, we're placing a significant amount of attention on gatekeepers,” Bustillo detailed. “Not only at the local level, but in many of our offices, especially those in regions where microcap fraud is prevalent.”

“We're continually asking ourselves, ‘How do we get ahead of the curve in these types of cases? How do we get the biggest bang for our buck?’”

One way, he said, is concentrating on the larger investment schemes. Another way is to concentrate on gatekeepers. “If we can put one of these gatekeepers out of business, we can have a much greater impact. Often these are people that are facilitating not just one of these fraud schemes, but many of them.”

In such schemes, the roles played by attorneys, accountants, and analysts can be crucial, Bustillo noted. Attorneys, for example, may facilitate a fraudulent scheme by providing legal opinions and other needed documents. “So, yes,” he said, the commission will continue to bring cases against gatekeepers.

Meanwhile, Bustillo told BNA, the MRO has staff from three of the division's five specialty units—asset management, municipal securities, and the Foreign Corrupt Practices Act; as such, there are likely to be more cases coming out of those units.

More generally, Bustillo recounted, his office tracks the division's priorities across the country. However, the Miami office also emphasizes certain areas that are more prevalent within the region, especially south Florida: boiler rooms, offering frauds, stock manipulation, and related misconduct. Why is south Florida a magnet for scam artists? There are a number of factors, Bustillo posited.

First, he noted, there is a large senior community; “they move out here to retire and they bring their retirement money.”

There also is a large, diverse international community, and a large transient community.

“We have a lot of people coming in from many different places, who are able to blend in without attracting the same attention they might in other areas of the country.” As such, fraudsters and scam artists “are able to fit in without necessarily raising red flags.”

“It's a very entrepreneurial area of the country, for the most part legitimate. But there are some that don't want to do it legitimately the way others do—they do it fraudulently,” Bustillo concluded.

Whistleblowers, TCRs

However, the MRO's oversight authority is not limited to south Florida. While “Florida alone keeps us rather busy,”

Bustillo said, his office encompasses a wide geographical area that also includes Mississippi, Louisiana, the U.S. Virgin Islands, and Puerto Rico.

Within the Miami office, Bustillo continued, the enforcement and examinations programs work in close collaboration—a partnership that has given rise to “many of our most important cases.” In addition, the office also handles a number of cases based on TCR—tips, complaints, and referrals.

In gearing up for the launch of its whistleblower bounty program, the commission established a single, searchable database system of records for the tips, complaints, and referrals it receives about possible securities law violations. Bustillo explained that the new TCR system was intended to allow staff to “connect the dots” more quickly as information comes into the system. As such, “what looked like a very small fraud cases can quickly be identified as a much larger scheme.”

TCRs “have quickly become a great source of … cases for all of our regional offices,” and for headquarters, Bustillo said.

Similarly, the whistleblower program has become a great source of sound, actionable information that is allowing enforcement staff much more quickly to identify cases that might otherwise have gone undetected—cases in which the fraud “is of such a nature that unless somebody actually points it out to us, is very difficult to recognize.”

For example, Bustillo explained, many whistleblowers are represented by counsel with securities experience who are able to present the information in a way that allows regulators to quickly assess a case and move forward strategically. “I think you're definitely going to see more cases that were sourced out of a tip from whistleblowers.”

In addition, he predicted, the commission's cooperation initiative—unveiled in the 2010 restructuring—“will continue to … yield some great results for us.” The MRO currently is working with cooperators in a number of investigations, Bustillo noted.

He told BNA that as a formal federal prosecutor, he is “well aware” of the importance of cooperators. “In white collar cases, we almost always had one cooperator, if not more.”

Such cases require a showing of intent, which is difficult to prove “just by having documents,” Bustillo said. “You need somebody to tell you what was going on, and there is nobody better to do that than someone who was part of the fraud.” As the SEC defense bar becomes more familiar with how cooperation benefits their clients, “I think you'll see more and more of it.”

Internal Intelligence

Bustillo also predicted that there will be more cases generated by “internal intelligence”—information already available to the commission in public filings and similar documents.

He noted that the commission is turning more and more to technology to boost its ability to detect fraud and assess risks in the marketplace. For example, the Division of Risk, Strategy, and Financial Innovation—RiskFin—and the Office of Market Intelligence, are working with other divisions to use the “wealth of data we already have” to detect patterns that may indicate wrongdoing.

Bustillo noted that the financial industry is constantly evolving, developing new products and trading practices. The SEC, on the other, has approximately 4,000 employees nationwide. As such, it will have to continually leverage technology to keep pace, since its human capital “is always going to be limited.”

How do you leverage technology? By hiring more people with technology expertise, or building bigger computers? Both, according to Bustillo. “We have a wealth of information that through technology we want to combine and mine … to help us identify where there are problems.”

In addition, he related, the commission wants to continue to hire individuals with industry expertise in certain critical areas, such as complex financial products and structured finance, market structure, and trading practices.

On other topics, Bustillo told BNA that he is a strong advocate of investor education. He noted that while the commission attempts to recover as many funds as possible to compensate fraud victims, “realistically, in cases involving Ponzi schemes and other offering frauds, we're never going to recover 100 percent of the money.” As such, he said, he is a “true believer that if we can actually educate somebody and keep them from being defrauded, we're actually doing even better than investigating and prosecuting cases.”

The MRO has done a number of investor education events in Florida and throughout the region, some in partnership with the U.S. Attorney's Office. “We feel strongly that investor education is just as crucial as everything else we do.”


Eric Bustillo became director of the SEC's Miami Regional Office in early 2010. He joined the commission from the U.S.

Attorney's Office in the Southern District of Florida where he served as Chief of the Economic and Environmental Crimes Section.

Previously, between 1990 and 1995, Bustillo was a staff enforcement lawyer and branch chief in the Miami office.

In his current role as regional director, Bustillo oversees the MRO's enforcement and examinations functions in Florida, Mississippi, Louisiana, Puerto Rico, and the U.S. Virgin Islands.

He graduated from the University of Miami School of Business and the University of Miami School of Law.

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