SEC Creates New Task Forces and Analytical Hub to Crack Down on Financial Reporting and Microcap Fraud

by BakerHostetler

On July 2, 2013, the U.S. Securities and Exchange Commission (SEC) announced three initiatives together with a promise to employ an increasingly proactive approach to discover fraudulent accounting and securities practices. The SEC unveiled two new task forces and a center focused on analytical risk assessment, which will likely result in more investigations and enforcement actions relating to financial statement and microcap securities fraud. Andrew J. Ceresney, Co-Director of the Division of Enforcement stated that "[b]y directing resources, skill, and experience to high-impact areas, we will increase the potential for uncovering financial statement and microcap fraud early and bring more cases aimed at deterring these types of unlawful activity." A full version of the SEC's press release is available here.

The Financial Reporting and Audit Task Force

The Financial Reporting and Audit Task Force will concentrate their efforts on increasing identification of violations related to financial statement preparation, issuer reporting and disclosure and audit failures. While the SEC has traditionally relied on the market to flag accounting problems at companies, this task force will utilize cutting-edge technology, such as the SEC's recently developed Accounting Quality Model which collects data from nearly 9,000 publicly traded companies to identify outliers. In addition, the task force will engage in a continuous review of financial statements and revisions thereto as well as analysis of industry specific performance trends to find areas susceptible to fraudulent financial reporting. It will include a nationwide network of enforcement attorneys and accounts and will be chaired by David Woodcock, Director of the SEC's Fort Worth Regional Office.

The Microcap Fraud Task Force

In 2010, the SEC created the Microcap Fraud Working Group to amass data and develop new investigative approaches in this sector of the market. The Microcap Fraud Task Force will supplement the Working Group's efforts by concentrating on the investigation of participants in the microcap securities market in a search for fraud in the issuance, marketing and trading of microcap securities. The primary goal of the task force will be to develop and implement strategies for identifying fraud in the market with a focus on targeting "gatekeepers," such as attorneys, auditors and transfer agents, in addition to other enablers like promoters and shell company purveyors. The task force will be led by Elisha Frank and Michael Paley, both of whom are Assistant Regional Directors in the New York Market.

Center for Risk and Quantitative Analytics

The Center for Risk and Quantitative Analytics (CRQA) will serve as an analytical hub for the SEC, working closely with other Commission offices and divisions to provide counsel on how to best allocate resources given identified risk levels. The CRQA will support the Enforcement Division's risk-based investigations by identifying threats that could be harmful to investors, as well as developing methods of monitoring for indicators of possible illegality. The center will be led by Lori Walsh, former Deputy Chief of the Office of Market Intelligence.

With the announcement of these initiatives, it appears that the SEC is going back to basics to improve its enforcement statistics. In 2012, only 11 percent of the SEC's enforcement actions were focused on accounting fraud and financial disclosures, a significant decrease from previous years. By declaring a renewed focus on rooting out accounting fraud and bringing factually strong cases, the SEC is signaling not so much a new focus as a new commitment to seeking out violations of the securities laws. Coupled with the still emerging whistleblower program, the SEC is poised to make a multi-prong attack in key areas such as disclosure manipulation, insider trading and earnings management.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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