Do You Need to Know Enforcement Cases for Compliance?

Are you familiar with SEC investigations pertaining to the following companies?

Aladdin Capital
Diamondback Capital
Liquidnet
Paradigm Capital
SAC Capital
Galleon Capital

I admit that I only recognized SAC Capital and Galleon Capital. In a recent survey about half of alternative investment managers said that they were also familiar with those two cases. Half said they were not familiar with any of them.

Private Equity International pointed out this survey by Cipperman Compliance Services. Cipperman cited unfamiliarity with the cases as a indicator of adequate resources to address increased regulatory obligations.

I scratched my head a bit to figure out if I missed the cases or merely didn’t link the substance of the case with the firm name.

I searched the Compliance Building website to see if had mentioned the four cases.

It turns out that I wrote about Paradigm Capital in June 2014. The substance of the case was a whistleblower claim by a trader against his firm, Paradigm Capital. The firm was engaged in some principal trades that were violating 206(3)-2. The trader reported the problem to the SEC and the firm handled it poorly.

I also wrote about the Aladdin case in December 2012. It involved a false claim by the fund manager that its principals were investing in the fund alongside investors. I don’t remember the case being particularly remarkable. They were lying to investors.

Diamondback Capital was linked to SAC Capital and was allegedly involved in insider trading. The firm settled by paying a fine and entering into a non-prosecution agreement. The firm ultimately returned investor’s capital and dissolved. This was one of the expert network abuse cases. I remember the expert network investigations and still get questions from investors about the use of expert networks. I remember the issue, but not the case.

Liquidnet is a dark pool high speed trading case. The exchange settled the charges that it allowed outside traders to have access to the trading inside the dark pool. It’s an interesting look into the complex world of high-speed trading and dark pools. I don’t remember the case.

Circling back to the original question, I’m not sure knowing the case name is particularly necessary to understand compliance concerns. I find cases to be instructive on what is found to be bad acts. That’s why I write about them.

Yes, it’s a good thing for compliance officers to read the SEC’s enforcement actions. But I don’t think you need to be quizzed on cases.

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