“FINRA does really an amazing job of connecting the dots,” said Bowman, who coordinates securities fraud prosecutions in the U.S. attorney’s office in Los Angeles. “The work they do is incredibly helpful.”
The successor to the National Association of Securities Dealers, FINRA is an independent industry regulator and is funded by Wall Street, not taxpayers.
And although FINRA’s enforcement efforts have won praise, the regulator has drawn criticism for lapses. Its own board issued a critical 2009 report after FINRA’s failures to uncover Madoff’s scheme or that of fraudster R. Allen Stanford, who is serving a 110-year sentence for a $7 billion Ponzi scheme.
In response, the regulator folded its insider-trading surveillance program into the newly created fraud-detection and intelligence office, which Funkhouser now leads. The office’s ranks include a former terrorism investigator as well as erstwhile homicide and robbery detectives.
Since the financial crisis, FINRA has shown more zeal in aggressively pursuing cases no matter how insignificant they might seem, said Ernest Badway, a former enforcement attorney at the Securities and Exchange Commission who is now a white-collar defense attorney in New York and New Jersey.
“They’re going after every single type of insider case around,” Badway said.
The Wall Street watchdog has no subpoena power, so it turns over its findings to government agencies. And they’ve been turning in tips to the SEC at an unprecedented pace. The number of referrals last year reached 347, up from 259 in 2010.
This year the industry regulator is on track to match last year’s total referrals.
“There’s been no time in history that there’s been this regulatory pursuit of insider traders,” said Sam Draddy, a former SEC official who oversees FINRA’s insider-trading unit.
Draddy’s team deploys sophisticated computer algorithms that check for unusual trading activity before major company developments, which are often when stock market cheaters try to game the financial system. For instance, quarterly earnings or announcements of mergers routinely shoot stocks higher or lower.
A program called SONAR — Securities Observation, News Analysis and Regulation — monitors financial news. The program factors in a slew of variables: price movements, historical volumes, and 52-week highs and lows.
Then there’s SONAR’s gotcha moment. An alarm sounds in the form of “a break” appearing on the computers of FINRA analysts when the program detects any unusual trading ahead of big corporate news, and then managers wade through potential leads to decide which to follow.
FINRA typically is investigating 300 to 400 cases of suspicious trading at any given time. More than half involve first-time cheaters who simply couldn’t help themselves when they came across lucrative inside information, Draddy said.