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Wiretaps on Wall Street

Posted by Larry Doyle on October 26, 2009 11:11 AM |

“Leave the gun, take the cannoli.”

The world of organized crime evokes thoughts of payoffs, extortion, racketeering, and wiretaps. Are regulators now utilizing tools previously relegated to infiltrating the backroom dealings of the underworld to discover illegal activities on Wall Street? Yes, they are.

The news that regulators are now employing wiretaps to investigate financial frauds on Wall Street is sending a chill through Wall Street in general and hedge funds in particular. Why do regulators feel the need to utilize wiretaps?

Recall from the SEC’s and FINRA’s own internal reviews of their handlings of the Madoff and Stanford frauds that the regulators were woefully deficient in tracking and stopping these frauds. One of the greatest regulatory deficiencies highlighted is the use of technology.

Many hedge funds have spent millions upon millions of dollars on technology. These tools allow these funds to move with cat-like quickness in allocating capital and seizing investment opportunities. As we are learning, not all of these movements would seem to have been executed in a legal and ethical fashion.

How quickly can the regulators move to develop the necessary technical capabilities to track hedge fund activities? Don’t hold your breath.

Jules Kroll addressed the capabilities of the regulators relative to the tools employed by hedge funds on a Bloomberg interview this morning. Prior to my sharing Mr. Kroll’s assessment of the regulators’ capabilities, who is Jules Kroll? He recently founded a new firm, K2 Global Partners, which will look to “provide specialized risk services and solutions” to a wide array of global clients.

Mr Kroll has an extensive background in this space. From his website we learn:

Jules B. Kroll is the founder of Kroll Inc (NASDAQ: KROL) and is the acknowledged founder of the modern investigations, intelligence, and security industry. In 1972, he established Kroll Associates Inc. as a consultant to corporate purchasing departments, and in doing so, created the prototype for a new breed of professional services firm dedicated to mitigating risk. His firm ultimately reached annual revenues of $1 billion in 2008. By employing former prosecutors, law enforcement officials, journalists, and academics who utilized sophisticated fact-finding techniques to address decision-makers’ needs for accurate information, Mr. Kroll established investigations and risk consulting as valuable corporate services.

In the early 1990s, Mr. Kroll gained worldwide renown for his firm’s success in searching for assets hidden by Jean-Claude Duvalier, Ferdinand and Imelda Marcos, and Saddam Hussein. Since 1997, his vision of providing clients with a full spectrum of risk consulting services propelled the firm’s growth as a public company, in particular, its acquisition of employee screening, forensic accounting, data recovery, and corporate advisory and restructuring firms. This vision was fully realized in July 2004 when Kroll was acquired by Marsh & McLennan Companies (NYSE:MMC) for $1.9 billion.

Little doubt Mr. Kroll is beyond qualified to comment on the world of financial investigations and regulation.

How did Mr. Kroll describe the overall capabilities of regulators and regulations to battle fraud within the hedge fuind industry? In a very succinct manner, Mr. Kroll said the current capabilities of regulators and regulations are ‘miniscule.’

In light of those capabilities, what’s a regulator to do? Wear a wire.

Welcome to another twist and turn as we navigate the economic landscape.

Comments always appreciated.


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