The Conman and the Sheriff: SEC Jurisdiction and the Role of Offshore Financial Centers in Modern Securities Fraud*
Dhesi, Nick S., Texas Law Review
Congress founded the Securities and Exchange Commission (SEC) in 1934 in the wake of the greatest financial collapse in history. More than seventy years later, the SEC, charged by Congress with a mandate to preserve the national public interest through fair and honest markets, remains a critical force in policing U.S. markets. But while the scope and authority of the SEC's power has expanded over time, so too have the crimes it seeks to prevent. Over the last five years, a carousel of large, international frauds by well-known and well-regarded financiers undermined the integrity of global securities markets and international cooperation in market enforcement. Specifically, these crimes, perpetrated by rogue financiers like Bernard Madoff and Sir Allen Stanford, have cost investors in the Americas and beyond billions of dollars. In light of these inventive frauds, no simple solution can prevent all forms of financial crime; however, this Note advocates an expansion of SEC authority to place a substantial hurdle in the way of these clandestine conmen in the hopes of stripping them of a primary tool-the use of offshore financial centers (OFCs).
To prevent conmen from avoiding SEC jurisdiction and capitalizing on self-interested local regulation in OFCs, this Note encourages Congress to grant the SEC the authority to initiate investigations on foreign soil-with prior consent from foreign regulators-when it perceives a substantial threat to investors in the United States. To support such an expansion of authority, this Note first provides a primer on OFCs and their use by international fraudsters, drawing from three recent case studies of securities fraud. Then, this Note will explain the expansion of SEC authority while addressing both the inefficiencies in the SEC's current cooperative model and the precedent for such an expansion of authority-Title III of the USA PATRIOT Act. Finally, this Note will apply the SEC's expanded jurisdiction to the three case studies discussed earlier to demonstrate how this new approach can prevent the types of frauds that threaten the integrity of U.S. markets and the national public interest.
I. Enhancing SEC Jurisdiction to Combat International Fraud - An Introduction
In light of persistent technological innovation and the integration of global markets, the Securities and Exchange Commission (SEC) must adapt constantly to new challenges threatening its domain.1 As the recent financial crisis again demonstrates, the effects of adverse market conditions in one nation can cause unforeseeable damage across the world.2 Moreover, given the speed of modern transactions, where money deposited in Omaha before breakfast can be in London for tea and in Hong Kong by dinner, regulators often have trouble keeping pace with increasingly complex, rapid communications.3 Amidst this changing economic and regulatory landscape, a new villain has emerged to challenge the SEC: the international fraudster or conman.4 Recently, these conmen, like Sir Allen Stanford and Bernard Madoff, have dominated the press with the exploits of their multi-billiondollar frauds.5 To impede the proliferation of international conmen, this Note will investigate the role that offshore financial centers (OFCs) play in modern cons and offer a possible mechanism by which the SEC may be able to mitigate the damage done by fraudsters.
Specifically, the manner in which conmen utilize OFCs in their frauds often raises red flags that something is amiss, giving regulators an opportunity to stop a fraud before it escalates.6 However, despite the prevalence of these indicators, the SEC cannot act peremptorily to halt a growing fraud because it is unable to rely on foreign regulators in these OFCs,7 and it lacks the authority to initiate unilateral investigations within foreign borders.8 As a result, conmen engage in OFC-based activity to avoid SEC jurisdiction and capitalize on self-interested local regulation,9 placing substantial hurdles in the way of the SECs enforcement efforts. …