The Securities and Exchange Commission’s insider trading case against Galleon Group hedge fund is out of the ordinary in at least one respect: It is based in part on the use of wiretaps and recordings of conversations.
This strikes legal experts as unusual for an SEC investigation, since the agency has no wiretapping authority.
“It is unusual,’’ said Robert S. Khuzami, director of enforcement at the SEC, at a November discussion of hedge fund regulation before the Practising Law Institute in New York. But, within a year, he said, “I hope it’s more common.’’
Khuzami noted that the SEC has no wiretapping authority. That belongs to the Justice Department, which has considerable experience in that regard and works closely with the SEC in investigating potentially illegal activity such as insider trading at Galleon.
SEC watchers should not be surprised if more creative techniques involving the capturing of electronic messages and other evidence are forthcoming, as the SEC works to erase the perception that it stumbled badly by failing to uncover the massive Ponzi scheme run by Bernard L. Madoff, Khuzami said, however.
“We will do everything we can to adopt whatever creative investigation techniques that appear appropriate to the case” being pursued, Khuzami said.
Arrows in the Quiver
When the SEC was established by Congress in 1934, a primary motivator for its creation was to prevent corporate abuses relating to the offering and sale of securities and corporate reporting.
As such, the agency has a number of arrows in its quiver. The SEC was given the power to license and regulate stock exchanges, the companies whose securities trade on them, and the brokers-dealers who conduct the trading.
Also, unlike self-regulatory organizations such as the Financial Industry Regulatory Authority (FINRA), Congress gave the SEC the right to issue investigative subpoenas for documents and testimony.
The SEC also has considerable authority in the increasingly important area of electronic communications. The agency requires email messages to be preserved for three years. Any firm reasonably on notice of a potential claim or lawsuit must take reasonable steps to preserve potentially relevant emails.
The duty to produce those emails depends on a variety of factors, including relevancy and privilege, the same as with any other type of document.
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