Four months ago, investigators from the Securities and Exchange Commission shut down an alleged investment fraud scheme in which an Atlanta money manager is accused of diverting $16.5 million to buy a beach house and bankroll personal expenses.
Authorities say the fraud committed by investment adviser Stanley Kowalewski likely will end up costing several Georgia nonprofit organizations, pension plans and other companies. But, they say, the losses would’ve been much higher, if not for the routine audits by the SEC that discovered the purported wrongdoing.
Next year, it’ll be up to Georgia regulators to root out irregularities at such firms.
Under the Dodd-Frank Act, a major federal regulatory overhaul enacted in 2010, states will become responsible for supervising midsized money managers with up to $100 million in assets, up from a $25 million cap now. That change, federal authorities say, should free up the SEC to investigate bigger money managers and discover potentially headline-making scams before they make headlines.
Georgia regulators will be primarily responsible for supervising 103 additional firms — about a 20 percent increase. But, including out-of-state firms also registered here, the state estimates its regulatory workload will jump by 344 firms. That’s a 70 percent increase, although Georgia expects to share supervision of those firms with other states.
“Smaller investors are going to have one less watchdog, and it’s bad for the industry,” said Jay Gould, a San Francisco attorney for investment funds.
It’s unclear whether Georgia is ready for the bigger job.
The state last year folded its securities division into two other departments to cut costs. And it has cut its securities supervision budget by half since 2008, to roughly $1 million.
Such signs worry Joseph Borg, Alabama’s securities commissioner, who says Georgia will need to “get up to speed” before the switch takes effect.
Otherwise, without a strong securities watchdog, “the less reputable players in the industry will gravitate toward that state,” said Borg. “I’d hate to see Georgia become the dumping ground for the worst of them.”
The federal mandate means more work for Georgia regulators, but the state will be ready, said Vincent Russo, the secretary of state’s general counsel and the interim head of securities enforcement.
“I don’t think investors in Georgia should be worried,” said Russo. “At the end of the day, we’ll be able to meet our increased responsibilities under Dodd-Frank.”
David Yurko, one of about 125 victims who were defrauded of $28 million in a Ponzi scheme a few years ago in the Marietta area, hopes the Dodd-Frank law will somehow improve securities regulation.
“I don’t know that any regulatory authority was watching this,” Yurko said of the fraud that impacted him.
His case involved Marietta lawyer Robert Copeland, who sold bogus private mortgage loans to investors for five years before the scam collapsed in 2009 and the FBI and federal Securities and Exchange Commission investigated.
Yurko and his wife had invested more than $110,000 of retirement savings, house fix-up money and their daughter’s college funds in the scheme. The Lilburn couple is luckier than most. They expect to recover almost half through a damages award against their broker.
Copeland is now serving a 10-year sentence in federal prison.
In the wake of Bernie Madoff’s giant Ponzi scheme, government officials at both the federal and state levels said they hope that the change in regulatory responsibilities will free up the SEC to focus on larger money managers.
The Dodd-Frank law takes effect July 21, but SEC officials say the affected money managers likely won’t be required to switch to state regulation until early next year.
The SEC’s 100-person staff in Atlanta spends about a fourth of its time examining investment advisers in five states.
“We’re going to do our best to make sure no one is harmed as a result of the switch,” said SEC regional director Rhea Dignam.
But critics of the switch say securities regulators in many states will be strapped for cash and ill-prepared to take on examinations of larger, more complicated firms as a result of the Dodd-Frank Act.
“Dodd-Frank doesn’t say anything about whether your examination division is adequately funded,” said securities attorney Gould, a former SEC lawyer. Many states “do not have as sophisticated enforcement capabilities as the SEC,” he said.
State regulators counter that they will do a better job bird-dogging smaller money managers that are examined rarely, if at all, by the chronically short-staffed SEC.
“There were about 3,000 firms [nationwide] that just were never examined,” said Bob Webster, spokesman for the North American Securities Administrators Association, which represents state securities regulators.
After the change, states will be monitoring about 18,000 investment firms — about 4,000 more than now — as a result of the financial overhaul law, NASAA estimates.
To get ready, states entered a pact that will allow them to borrow examiners from neighboring states if needed. Webster said several states also are beefing up their enforcement staffs and meeting with investment advisers to “walk through the examination process.”
Though Georgia’s unit is still not up to full staff, the secretary of state’s office, which enforces the state’s securities laws, hired two examiners last year, said Russo.
The agency also expects to use NASAA’s recently developed examination software to prioritize the order in which firms will be examined, based on how risky they are, and to consider joint examinations with other states.
“We’ll have more work for our agency, but I don’t think that means that we won’t be able to meet our responsibilities,” said Russo.
Meanwhile, however, the agency’s securities enforcement unit disappeared as a separate division last year, and its long-time director recently departed in the wake of budget cuts. The secretary of state’s office is seeking a new head of enforcement.
Early last year, Secretary of State Brian Kemp announced that he was folding the agency’s securities division into its professional licensing division in Macon. The latter department oversees dozens of state licensing boards that issue 197 types of licenses to about 400,000 state residents.
Responsibility for securities fraud investigations was folded into the secretary of state’s agency-wide investigations arm.
The move is expected to save about $500,000 a year.
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