SEC Fraud Probes Said to Suffer If E-Mails Kept PrivateTodd Shields and Joshua Gallu
There’s a tie that binds the U.S. Securities and Exchange Commission’s separate probes of SAC Capital Advisors LP founder Steven A. Cohen and Fabrice Tourre, the former Goldman Sachs Group Inc. vice president.
It’s old e-mails, which feature prominently as evidence in SEC enforcement actions.
How the agency obtains e-mails has become the subject of a Washington debate, pitting Wall Street’s top regulator against privacy advocates and Internet companies, which say the information they store should be as secure from government seizure as documents in a desk drawer.
The SEC is fighting legislation that would trim government access to personal and corporate e-mail kept for customers by third-party providers, such as Amazon.com Inc. and Yahoo! Inc.
Bipartisan legislation requiring agencies to get warrants to access e-mails could have “a significant negative impact” on enforcement efforts, SEC Chairman Mary Jo White said in an April letter to Congress. The SEC, a civil regulatory agency, doesn’t have authority to obtain warrants.
“I think there’s critical mass to get this legislation through,” Kevin Richards, senior vice president for federal government affairs at TechAmerica, a Washington-based trade group with members including Microsoft Corp., Hewlett-Packard Co. and International Business Machines Corp., said in an interview.
The SEC has “often” asked Internet service providers for e-mails “because persons who violate the law frequently do not retain copies of incriminating communications,” White said in her letter to Senator Patrick Leahy, the Vermont Democrat who is chairman of the Judiciary Committee and a sponsor of the bill. The legislation awaits a vote by the full Senate; a similar bill is being considered in the House.
SEC spokesman Kevin Callahan declined to comment on whether the agency used this method to obtain emails used in the SAC Capital or Tourre cases.
E-mails have taken starring roles in both cases.
In Tourre’s trial yesterday, SEC attorneys asked him about one 2007 e-mail in which he dubbed himself “the fabulous Fab” who forged “complex, highly levered, exotic trades.”
“This is a silly, romantic e-mail I sent late at night at a moment of market stress,” Tourre said.
When it accused Cohen last week of failing to prevent insider trading, the SEC cited a 2008 e-mail he received as a supposed warning sign that his employees may be making illegal trades. Cohen’s lawyers said he never read the e-mail.
Reduced access to e-mails could harm some investigations, Steve Crimmins, a former SEC trial attorney who is now a partner at law firm K&L Gates LLP in Washington, said in an interview.
“In dealing with large corporations which have responsibly maintained e-mail communications, the SEC will be able to get all the e-mail it needs,” Crimmins said. “But in cases with less responsible entities or investigations just involving individuals, the SEC will be severely hampered in getting the evidence it needs to bring a case.”
The SEC has authority to issue administrative subpoenas, which require the recipient to hand over all relevant documents. However, many SEC probes are covert, so investigators subpoena information from third parties, such as trading records from a brokerage or e-mails from a third-party Internet service provider, without tipping off the subject.
The Senate measure would update a 1986 law by extending its warrant requirement for recent e-mails to those older than 180 days, which weren’t shielded when the statute was written.
“The bill as currently constituted could have a significant negative impact” on enforcement efforts, White said. She proposed allowing access to communications from Internet service providers if agencies first meet a judicial standard comparable to the one for criminal warrants.
White’s proposal is opposed by companies, including the biggest U.S. Web portal Yahoo, online storage provider Amazon.com Inc., electronic market hub EBay Inc., personal-finance software provider Intuit Inc., and search-engine leader Google Inc., in addition to groups such as the U.S. Chamber of Commerce and the American Library Association. They said in a July 12 letter to Congress that the SEC sought a “sweeping change” that would allow other agencies conducting civil investigations, such as the Internal Revenue Service and the Environmental Protection Agency, to get e-mail without warrants.
“It will no doubt be dubbed ‘the IRS exception’ because it would give all federal agencies including the Internal Revenue Service access to e-mail and internal communications without a warrant,” Gregory Nojeim, senior counsel at the Washington-based Center for Democracy & Technology, a policy group that works for Internet freedom, said in an interview.
The original act was passed 27 years ago, when e-mail was a novelty and “no one could have imagined the way the Internet and mobile technologies would transform how we communicate,” Leahy told colleagues March 19 as he introduced the bill.
Companies face a welter of requests from local courts and sheriffs, federal agencies and county governments, and have a “broad consensus” that the law needs to be updated, Ed Black, president of the Computer & Communications Industry Association, a Washington-based trade group with members including Google, Yahoo, Facebook Inc. and Microsoft Corp., said in an interview.
Disquiet over domestic intelligence-gathering revealed by fugitive Edward Snowden, a former security contractor for Booz Allen Hamilton Holding Corp., has spurred lawmakers to debate controls on government access to private information, improving odds Congress will pass the bill, Nojeim said.
The Senate bill is co-sponsored by Senator Mike Lee, a Utah Republican. Similar legislation in the House, introduced by Representative Kevin Yoder, a Kansas Republican, has attracted 136 co-sponsors.
The business of storing information remotely, in the so-called cloud, was worth an estimated $110.3 billion in 2012 and could expand to $210 billion by this year, according to Gartner Inc., a technology researcher based in Stamford, Connecticut. Growth in the sector where leaders include Google, Apple Inc., Microsoft and Amazon could slow if businesses are concerned their information isn’t secure, according to a June 13 report by Bloomberg Government analysts Michael Nelson and Allan Holmes.
“Companies have -- and our customers want us to have -- a duty and the legal ability to protect their privacy,” Black said.