On October 11, 2012, in a speech at the 2012 New England Securities Conference, SEC Chairman Mary Schapiro discussed the new technology initiatives being employed by the SEC’s Enforcement Division to bolster its capabilities to investigate suspicious trading. According to Schapiro, “[u]pgraded technology makes it possible to wade through literally millions of documents and thousands of hours of conversations to find the proverbial needle in a haystack that lets us sew up a case.”
During the speech, Schapiro discussed a number of the SEC’s new initiatives, including its recently instituted Automated Bluesheet Analysis Project. According to Schapiro, this initiative adds “another dimension” to the SEC’s investigative capabilities, with the SEC enforcement staff using newly developed analytics to identify suspicious trading patterns and relationships among multiple traders and across multiple securities to generate enforcement leads. Schapiro stated that this new initiative has already generated significant insider trading enforcement actions, including its high-profile case against Matthew Kluger, a corporate attorney, and Garrett Bauer, a trader, who ran a lucrative insider trading scheme spanning two decades by communicating through a middleman using public telephones and prepaid mobile phones. Schapiro said that the SEC was initially unaware of Bauer’s or the middleman’s relationship with Kluger, but that parallel analysis of the bluesheet trading data enabled the SEC to successfully identify the middleman and uncover his relationship with Bauer.
Schapiro also discussed the SEC’s new Aberrational Performance Inquiry team, which is an initiative by the SEC Enforcement Division’s Asset Management Unit that uses proprietary risk analytics to review investment performance data to identify hedge fund firms that may be engaging in fraudulent practices “before a tip is received or a routine examination discovers the questionable behavior.” She noted that this initiative has also already led to fraud enforcement actions (including the action against Yorkville Advisors LLC and two of its executives that is discussed in more detail elsewhere in this Investment Management Regulatory Update) and to the SEC having brought suspicious behavior to the attention of regulators in 17 countries.