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June 19, 2018

Raising The Risks of Securities Fraud

David Poppe | 6/1/1995
Senatore, 40, came to the job with an impressive background as both a federal prosecutor and a civil litigator. A 1980 graduate of the University of Chicago Law School, Senatore rose in just three years at the U.S. Attorney's office in Miami to chief of the public corruption unit in 1988. More recently, he worked as a partner in the (since-closed) Palm Beach office of New York law firm Cadwalader, Wickersham & Taft. When he took the job as regional director of the SEC's Southeast region, which includes eight states, the Virgin Islands and Puerto Rico, he said his mandate was to 'raise the risks' of violating securities laws. After little more than a year on the job, he feels he's making progress - but says Florida remains a hotbed of illegal investment schemes.

FLORIDA TREND: Traditionally, half of all SEC enforcement actions in the Southeast region take place in Florida. Is that situation changing for the better?

SENATORE: The ratio is about the same. Even with our 120 people, I could probably productively employ 300 people just from Palm Beach County south.

FT: It seems like the white-collar crime du jour is wireless telephone schemes.

SENATORE: Wireless, cable and specialized mobile radio, I sort of group them together.

FT: Can you outline the way they work?

SENATORE: It begins with a TV infomercial made to appear like a financial news broadcast or a normal news show, but what it does is pitch this unbelievable investment. They flash 800 numbers on the screen and some very, very promising things are said about this new industry.

FT: What are the mechanics of these wireless investment frauds? Do the promoters represent themselves as actual or potential license holders?

SENATORE: People call the 800 number and the infomercial provider creates a lead list, which is then transmitted to the promoter. Then there is a cold call based upon the lead list. If there is some interest, then another person makes a phone call, playing the role of a high-pressure, closer-type salesman.

The thing the investor needs to watch out for is, if someone is really coming on hot and heavy - saying, 'You have to act now! Don't take any time to think about it! Don't talk to a financial adviser!' - and if they are unwilling to send you complete prospectuses, or describe the investment in detail, but make outrageous promises such as guarantees, those are all red flags of a fraud. More often than not, if you send your money, you are going to lose it.

FT: Is the SEC, and specifically your office, looking at some of the derivatives cases that we've seen in Florida? Escambia County, Collier County and the Palm Beach Sheriff's office all lost a lot of money investing in derivatives.

SENATORE: I can't confirm or deny the existence of actual investigations. But, especially in the municipal context, this is something that is near and dear, in my judgment, to the chairman of the Securities and Exchange Commission, Arthur Levitt, Jr.

I think his concern in the municipal area has been piqued by the fact that, either through mutual funds or direct ownership, more numbers of the 'man on the street' have interests in municipal bond offerings. I think the latest numbers we found were 76% of individual investors have interests in municipal bond offerings.

So to the extent that derivative-type investments have hurt municipal investors or have hurt the financial position of the issuers, I think that would be something that would be of concern to him. As a corollary to that, we also are concerned about what we call 'pay-to-play,' sort of a nickname for a situation where underwriters feel they must make contributions to political candidates or officials in exchange for being able to successfully obtain municipal underwriting business.

FT: The SEC's Southeast regional headquarters office moved to Miami from Atlanta a little over a year ago. Give us some background on why that decision was made and what it has accomplished.

SENATORE: I believe what was driving this had a lot to do with demographics. If you were to chart our cases, you'd see that the lion's share of what had been produced in the region arose right here in Florida. The chairman thought it might make sense to go where the fish are.

FT: You came on board with what you described as a mandate to beef up enforcement of securities law violations. Do you feel you've made progress?

SENATORE: We still have miles to go; however, there has been improvement. The first thing we did was beef up the enforcement staff. In this climate of budget-cutting and concern over the allocation of resources, I had my own 100-days project, if you will. I made a presentation to the SEC chairman to ask him to do something that was sort of unusual, which was a mid-year adjustment of resources to enable us to accelerate the process of growing the Southeast regional office. I basically prepared a presentation based on demographics: numbers of broker-dealer branch offices, for example, and the distribution of the population. Compared to the other regional offices, ours was understaffed.

He found my presentation, I guess, persuasive because he wound up giving us some more authority to hire in the middle of the year. Between that and budgeted growth in fiscal 1995, the enforcement staff in the region has grown by about 15%.

There are other program areas also that we use to help detect fraud. We have a very strong regulation program, where examiners go out to examine broker-dealers, investment companies and investment advisers. We were able to increase that also by about 15%.

FT: So how many employees does the SEC have in the region now?

SENATORE: When I came on board in 1994, we had a hiring ceiling of 101 employees. We now have a hiring ceiling of 124. We basically have been able to increase the staff by a good 17 or 18 people.

FT: What is the breakdown of employees between enforcement of securities laws and regulation of securities dealers?

SENATORE: We have 67 people that are allocated to the enforcement program and about 46 or so that are allocated to the regulation programs, which involve broker-dealer regulation and the investment company/investment adviser staff.

FT: Besides adding people, how have you made the SEC more effective?

SENATORE: We took another look at the relationship that we had with the U.S. Attorneys' offices in the region. We've tried to emphasize criminal prosecutions and streamline and keep alive that contact. We've tried to improve what was already a good relationship with the state securities regulators and the self-regulatory organizations. One of the things I did last year was I paid a personal visit to every state securities regulator in the region. Some cases, which we might not be able to do ourselves, are handled by various state regulators that have quite capable staffs. The state of Florida staff, for example, is just first class.

FT: As you go into your second year, what are your priorities?

SENATORE: We'll be continuing the municipal bond focus, both in the pay-to-play area and to the extent that there might be sales-practice problems in the derivative area.

We'll be looking at sales practices in general because they affect retail investors. A big thing for us will be failure to supervise. Firms are required to supervise the registered reps who work for them. It's sort of the first line of defense. We'll be looking very, very carefully at matters of sales-practice abuses and firms' failure to supervise. Another area will be matters involving mutual funds. We'll be looking at fund managers who are doing personal trading. We'll also be looking at investment advisers, which is a particularly big industry in South Florida.

One thing we'll be looking at is performance-advertising violations by investment advisers. There are very strict guidelines for that and, unfortunately, the investment advisory community down here, in some circles, does not take that very seriously.

FT: Florida's image is almost the Wild West. People come down here and they'll sell anything, any way. I'm curious if you think the SEC can change that culture?

SENATORE: One thing that's going to be big for us is investor education. We're going to try to have meetings and actually get the staff out there to speak to investors - to educate them, to let them know what their rights are, what the red flags are, to know what they can expect from brokers and the mutual fund community.

I want to see fewer people fulfill P.T. Barnum's prophesy about a sucker being born every minute. If we can do our job in a way where the investor doesn't write the check, we've really done the best that we can in preventing fraud.

Tags: Florida Small Business, Politics & Law, Business Florida

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