Under Increasing Pressure, Regulators Suggest Changes

Staff Reporter

With complaints from burned investors growing ever louder, securities regulators are feeling the heat and they appear to be responding.

Harvey Pitt, who replaced Arthur Levitt last summer as chairman of the Securities and Exchange Commission, proposes several sweeping changes to make financial reports easier to understand, more useful to investors and more current.

Chief among his recommendations is one to require public companies to disclose material information continuously, rather than quarterly, as is now required.

"Investors need current information, not just periodic disclosures," Pitt wrote in a commentary published last week in the Wall Street Journal.

More timely filings would drastically change the enforcement landscape, although officials at the SEC's Los Angeles office point out that investigators get tipped off to possible infractions from a multitude of sources. Among them: the SEC's own field inspectors, investigative media reports, disgruntled employees, former business partners, competitors and ex-spouses.

New regional director

"We always have more leads than we can bring as cases," said Rosalind Tyson, acting SEC regional director who will be replaced starting this week by Randall Lee, who has been an assistant U.S. attorney in Los Angeles. "So the regional director gets to decide which cases we bring, which we don't bring and which we refer to other agencies."

Right now, the SEC's L.A. office is focused on two big cases: an alleged Ponzi scheme operated by Pinn Fund of San Diego, and a case involving allegedly bogus pay-telephone investment contracts sold to some 7,000 investors nationwide by Alpha Telecom.

Lee will direct the activities of the 139 SEC staff members in Los Angeles and 71 in San Francisco who are responsible for investigating and prosecuting securities-related cases in all eight Western states.

"We can bring a case in a couple weeks if we think money may be dissipated, we can get a temporary restraining order from a court very quickly," Tyson said. "Other investigations can take a month, or a year, or more."

The SEC's L.A. office is no stranger to high-profile cases. Among its recent efforts were the Emulex Corp. Internet hoax, financial fraud at McKesson HBOC, Ponzi schemes at Capital Consultants and TLC, and a kickback scheme operated by noted investment adviser Alan Bond.

Prevalent scams of the moment in L.A. are those promising "guaranteed returns," which have an appealing ring to many of today's risk-averse investors.

"Last year, during the energy crisis, the emphasis of the telemarketer come-ons was energy," Tyson said. "Now they've moved onto other come-ons, and the word 'guaranteed' seems to be coming up a lot."

It's unclear how the more stringent filing requirements being proposed by Pitt would affect regional offices like L.A. Tyson emphasized that the new regional director won't merely carry out the marching orders from Washington and indeed, much of what is being proposed relates to preemptive disclosures rather than after-the-fact investigations.

"We always have more leads than we can bring as cases," Tyson said. "So the regional director gets to decide which cases we bring and which we refer to other agencies."

Investors' right to know

As for Pitt's recommendations about continuous disclosure, the initial reaction from companies isn't exactly positive.

"It would be very difficult and costly for companies to try to meet that obligation," said Dhiya El-Saden, a partner specializing in securities law at Gibson Dunn & Crutcher LLP in Los Angeles. "They would have to be constantly making pronouncements, including some that would kill deals in progress. You have to weigh the public's right to know against a company's right to compete."

But in the current environment, the investors' right to know seems to be gaining momentum.

In his quest to give investors higher-quality, timelier information, Pitt is reaching out to the securities industry's self-policing entities, such as the National Association of Securities Dealers and stock exchanges.

On Oct. 23, Pitt issued a report laying out a framework under which the agency would be more lenient on companies that voluntarily disclose information about internal investigations and infractions.

Such overtures already are drawing criticism from the likes of William Lerach, a partner at Milberg Weiss Bershad Hynes & Lerach LLP, who has made a career of representing investors in securities-related class action lawsuits.

"Unfortunately, over the years, the regulated capture the regulators," said Lerach. "Levitt used to brag about how each month he would have dinner with corporate executives, so they could tell him what he was doing wrong. Now they bring in a guy (Pitt) who has spent his career defending accountants in court."

Prior to joining the SEC, Pitt was a defense attorney specializing in representing Big Five accounting firms in securities-related matters.

While the SEC is by far the most important securities regulator, several other entities also play roles in securities enforcement activities.

The other government enforcer in town is the California Department of Corporations. It has jurisdiction over any cases involving state-registered broker/dealers, and any involving victims and/or perpetrators who are California residents.

Tyson said the SEC's L.A. office regularly cooperates on cases with state investigators in California and other Western states, but such cases tend to be smaller ones because the big cases usually involve parties in multiple states. Resource-wise, the department is comparatively modest: 17 investigators, nine financial examiners and 24 attorneys to investigate and prosecute securities law violations.

One former NASD official referred to it as a "junior SEC." "By the time they get around to bringing a case, the building has burned down already," the former official said.

Assistant Commissioner Andre Pineda blamed investors for waiting too long before filing a complaint, and stressed the need for more emphasis on public education.

"It can't just be about investigating and enforcing, it also has to be about public education, he said, "especially among those most vulnerable our state's growing population of seniors."

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