President Barack Obama is setting up an investigative unit to crack down on financial fraud, but it remains to be seen whether the initiative has more political bark than substantive bite and how it will affect investment advisers.
“We’ll establish a financial crimes unit of highly trained investigators to crack down on large-scale fraud and protect people’s investments,” he said in his State of the Union speech last week.

The White House didn’t re-spond to questions about the size of the unit, its budget or its specific agenda.
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The “Blueprint for an America Built to Last,” released in conjunction with Mr. Obama’s speech, said that the unit will work with U.S. attorneys under the direction of U.S. Attorney General Eric Holder.

Notionally, it is similar to the Financial Fraud Enforcement Task Force, which was established in November 2009 and involves more than 20 federal agencies and 94 U.S. attorney’s offices.

Separately, Mr. Obama is creating a unit of federal prosecutors and state attorneys general within the task force to conduct investigations into mortgage-backed securities.

UNCLEAR GOALS
Experts said that it isn’t clear exactly what Mr. Obama is seeking from the financial crimes unit. It could bolster the ability of U.S. attorneys to pursue market malfeasance by giving them more resources.

Currently, the majority of crimes prosecuted by those offices are related to drugs and immigration.

U.S. attorneys “lack the personnel to conduct a timely, thorough, efficient investigation of highly complex financial transactions and securitizations,” said Steve Scholes, a partner at McDermott Will & Emery LLP.

Mr. Obama’s speech was delivered to Congress in a highly charged atmosphere with the national election looming in November. The Financial Crimes Unit fits neatly within one of his re-election themes: making the economy fairer and ensuring that “everyone plays by the same set of rules.”

“This is about the economic divide,” said Ellen Brotman, a partner at Montgomery McCracken Walker & Rhoads LLP and a former federal public defender. “There’s a sense that powerful, rich people get away with things.”

“BEING TOUGH’
Setting up the Financial Crimes Unit is a way for Mr. Obama to address that issue without having to get approval from Congress.

“There is a significant aspect of this which is political and is designed to give the impression of being tough on Wall Street,” Mr. Scholes said.

Some observers predict that it will have a significant impact on investment advisers. The Financial Crimes Unit could add momentum to the Securities and Exchange Commission’s Asset Management Unit, a group in the Division of Enforcement created to strengthen the policing of advisers.

“There’s going to be a lot more pressure on advisers and brokers,” said Ms. Brotman, who noted that federal interagency cooperation is increasing.

“The Department of Justice is going to be looking for an opportunity to make an example of someone,” she said. “There’s no doubt in my mind that’s going to be one of the industries they’ll be looking at.”

Others aren’t so sure.

“As the [White House] blueprint describes it, I wouldn’t expect the Financial Crimes Unit to touch the vast majority of advisers,” Dan Barry, managing director of government relations and public policy for the Financial Planning Association, wrote in an e-mail. “It looks like it would focus on outright frauds of a major scale — market-level frauds, and maybe your Madoffs and Stanfords.”

Thomas Gorman, a partner at Dorsey & Whitney LLC, expects that the Financial Crimes Unit to focus on problems surrounding asset securitization.

“To the extent advisers and broker-dealers are involved in the marketing of some of these products, they may fall within the parameters of this group,” said Mr. Gorman, co-chairman of the American Bar Association’s securities fraud subgroup in charge of white-collar crime.

Whether the initiative is effective depends on the approach it takes, according to Mr. Gorman.

It shouldn’t second-guess cases that already have been pursued by the SEC or Justice Department, or the states, he said.

Rather, it should cull lessons learned and outline ways to improve financial fraud investigations, Mr. Gorman said.

“It comes sort of late in the day,” he said of the unit.

“These issues have been investigated many, many, many times at this point. The critical thing is to focus so that it’s not rehashing what has been done,” Mr. Gorman said.

On its website, the SEC credits itself for bringing charges against 89 firms and individuals in cases related to the 2008 financial crisis and obtaining $1.97 billion in total penalties.

But the SEC’s $285 million settlement with Citigroup Inc. in October involving allegations that the bank misled investors about mortgage-backed securities was vacated by U.S. District Judge Jed Rakoff for being too lenient.

The SEC is seeking legislation that would allow it to increase the civil penalties it can levy.

Mr. Obama also urged Congress to put more teeth into the Wall Street crackdown.

“Some financial firms violate major anti-fraud laws because there’s no real penalty for being repeat offenders,” he said in the speech. “So pass legislation that makes the penalties for fraud count.”

Jan. 27 (Bloomberg) — The FBI said it searched the Manhattan offices of reverse merger advisory firm New York Global Group, which specializes in helping companies from China go public in the U.S.

New York Global describes itself as a private-equity and corporate advisory firm also with offices in Beijing. New York Global Group clients that became publicly traded in the U.S. through reverse mergers include CleanTech Innovations Inc. and Harbin Electric Inc.

“These searches were conducted in relation to an ongoing FBI investigation,” Jim Margolin, a spokesman and agent with the Federal Bureau of Investigation’s New York office, said yesterday in a phone interview. Margolin declined to discuss the reason for the Jan. 25 search of New York Global Group’s office at 40 Wall St. or who may be under federal criminal scrutiny.

Benjamin Wey, founder and president of New York Global Group, declined to immediately comment on the search. The news of the raid was first reported by The Financial Investigator.

In a reverse merger, a closely held firm buys a publicly traded shell company and retains its listing. The reverse-merger process is faster and less expensive than initial public offerings.

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Chinese Stock

Chinese stock trading in the U.S. has faced investor scrutiny after companies such as China MediaExpress Holdings Inc. disclosed financial irregularities or auditor resignations. Concern has focused on the more than 400 Chinese businesses that have used reverse mergers. The U.S. Securities and Exchange Commission in June cautioned investors about buying stakes in reverse merger companies, saying they may be prone to “fraud and other abuses.”

The SEC approved rules in November to toughen the listing standards for companies that go public through reverse mergers.

Wey has built a career bringing companies from China onto U.S. exchanges. He said in a 2010 interview that his clients didn’t want to wait to list at home and that a full-blown initial public offering in the U.S. is expensive and difficult.

In 2007, the American Stock Exchange delisted a fertilizer company that Wey brought over, Bodisen Biotech Inc., for incomplete and inaccurate disclosures related to share ownership by officers as well as payments to Wey’s company.

The Oklahoma Department of Securities censured Wey in 2005 for not advising customers of the risks of stocks he sold and not disclosing consulting relationships with some of the companies. Wey agreed to a ban on working in the securities business in the state without admitting to the allegations.

–With assistance from Nikolaj Gammeltoft in New York. Editors: Michael Hytha, Peter Blumberg

To contact the reporters on this story: Patricia Hurtado in Manhattan federal court at pathurtado@bloomberg.net; Dune Lawrence in New York at dlawrence6@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net; Gary Putka at gputka@bloomberg.net