grunt work

ROCKVILLE, Md. — Last week, when a former Boston Red Sox infielder faced accusations of insider trading, the Securities and Exchange Commission got credit for levying a $100,000 fine. The Department of Justice in May heralded a guilty plea from a one-time senior executive at the Nasdaq Stock Market who traded on secret information. And earlier this year, after a lawyer was accused of stealing insider tidbits, federal prosecutors in New Jersey boasted of the arrest.

But in each case, the federal government was not the first to detect the potential fraud. Rather, the initial alarm bells were sounded by an obscure group of private-sector analysts stationed here in suburban Maryland.

In an office park 20 miles outside Washington, the Financial Industry Regulatory Authority, Wall Street’s nonprofit self-regulator, has quietly built a small army of market police. Since Wall Street’s financial crisis in 2008, this fledgling fraud task force has entered the front lines of fighting insider trading, even if the group rarely earns the credit.

Finra’s fraud group is akin to being the sous chef to the S.E.C. and other government regulators: the team prepares evidence against America’s most-wanted traders, but receives little of the glory when the cases are served.

“We identify the dots so other people can connect them,” said Cameron Funkhouser, an executive vice president at Finra and the head of the insider trading group, known in regulatory speak as the Office of Fraud Detection and Market Intelligence. “We’re a clearinghouse of regulatory intelligence.”

The group has no shortage of cases to pursue. The federal government’s renewed crackdown on insider trading is playing out on multiple fronts, prompting a roughly 50 percent rise in S.E.C. enforcement actions over the last two years and 52 criminal convictions in New York.

And now, as the government’s purse strings tighten, more and more cases are coming from Finra, a nonprofit watchdog whose coffers are relatively plush. The fraud detection group’s roster has ballooned to more than 130 people, a roughly 20 percent jump since late 2009, when the group opened its doors.

Mac William Bishop/The New York TimesCameron Funkhouser, the head of fraud detection at the Financial Industry Regulatory Authority.

“We don’t have the bureaucratic baggage of the S.E.C.,” Mr. Funkhouser said. “People used to say, ‘We don’t really regulate that, it’s not in our jurisdiction.’ We don’t care.”

The role of aggressive regulator is an unlikely twist on Finra’s reputation. It has no subpoena power and, at best, has a spotty track record for detecting fraud.

Born out of the 2007 merger between the National Association of Securities Dealers and the New York Stock Exchange’s regulatory arm, Finra has traditionally stuck to monitoring 600,000-plus stockbrokers. It failed, critics say, to detect fraud and wrongdoing in the lead-up to the financial crisis. In 2008, the peak of the crisis, Finra filed 1,073 disciplinary actions, down from 1,204 two years earlier.

After the crisis, Finra’s board in October 2009 issued a report rebuking the organization for missing R. Allen Stanford’s investment scheme, among other problems. That same day, Finra announced the birth of the fraud detection group.

Finra already had a new whistle-blower unit, but Stephen Luparello, Finra’s vice chairman, decided to centralize the efforts into a larger group, paying particular attention to Ponzi schemes and insider trading.

Industry lawyers say the group’s expansion has sharpened Finra’s regulatory teeth. Last year, the group referred more than 500 potential fraudsters to the S.E.C. or other federal law enforcement agencies. Public Enemy No. 1 — suspected insider traders — made up 244 of the referrals, a record for Finra.

“Cam’s widely recognized as having a nose for fraud,” said Barry R. Goldsmith, a partner at the law firm Gibson Dunn, who was the senior enforcement official at the National Association of Securities Dealers. Mr. Funkhouser, a tenacious lawyer whose Finra career has spanned nearly three decades, “is an ‘I smell a rat’ kind of guy,” he said.

The group’s bread-and-butter inquiries aim at suspicious trading, usually by hedge funds and retail investors, ahead of mergers or startling earnings announcements. Finra opens an investigation after more than 90 percent of mergers.

The sleuthing often begins with a scan of the group’s specialized computer software, the Securities Observation News Analysis and Regulation, or Sonar as it’s known by the team. The program allows Finra to pinpoint mergers or other news, and then connect the events to an unusual price and volume movement in a stock.

The group then examines who worked on the merger, aiming to trace whether lawyers and bankers carry even minor connections to the traders. To help connect the dots, Finra analysts do what any dogged investigator would do: seek guidance from Facebook and Twitter. Once, Finra caught a former Lehman Brothers trader leaking inside information that he gleaned from his wife, a public relations executive.

The fraud group’s office here is replete with a “war room” — a basic conference room where six Finra managers gather every Wednesday to discuss the most promising insider trading cases. Occasionally, Mr. Funkhouser will even answer the group’s whistle-blower phone line, a task typically done by junior staff, or give tipsters his personal cellphone number.

While Mr. Funkhouser is the face of the crew, he has a deep, if eclectic, bench.

The head of the whistle-blower unit, Joe Ozag, was a terrorism detective for the United States Capitol Police and a former broker at Morgan Stanley. Anthony Cavallaro and Paul Lane once prosecuted homicides and robberies at the Manhattan district attorney’s office. The head of the insider trading group, Sam Draddy, was a high-ranking S.E.C. official in Washington.

The group’s sole high-ranking female member, Laura Gansler, wrote the book that formed the basis for the movie “North Country,” starring Charlize Theron. Mr. Funkhouser calls Ms. Gansler “the brain” of the group.

The group has become a source of pride for Finra, especially after the bruising days of 2008. Richard G. Ketchum, Finra’s chief executive, often dispatches e-mails to Mr. Funkhouser’s team after the S.E.C. files a case that originated at Finra. “Great win,” his notes say.

“It’s critical,” Mr. Ketchum said in an interview, “for investor protection and it’s critical for our reputation.”

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BankSimple, a Web-based banking service, says it is finally going live and expects its first customers to begin receiving their debit cards by early November.

The site still won’t be available to all comers right away. Josh Reich, BankSimple’s chief executive, said it had tens of thousands of names on its waiting list for accounts. But it is enrolling members gradually — a hundred or so at a time — to make sure the debut goes smoothly. The first enrollees are spread out across the country, in states including Michigan, California, Texas, New York and Oregon.

Of course, Web-only banks aren’t new. ING Direct, for instance, has been around for years. But BankSimple is not actually a bank. Rather, it aims to simplify the way you use banks, by making bill payment and budgeting easier, shunning the fees that banks traditionally charge (and which seem to be multiplying of late) and providing fast customer service. “We replace your bank,” Mr. Reich said.

Well, at least it’s trying to. But it still relies on old-fashioned banks for the grunt work. Money you deposit to BankSimple (via electronic direct deposit or, eventually, via a smartphone deposit app because there are no branches) are funneled into accounts at partner banks that are insured by the Federal Deposit Insurance Corporation — like Bancorp Bank, a midsize institution based in Delaware. Additional banks will be added as BankSimple grows, Mr. Reich said.

The partner banks pay BankSimple for its service, so the service is free to BankSimple depositors. The site eschews monthly fees, bounced-check fees, “all that nonsense,” Mr. Reich said. “We never profit from fees.” (Mr. Reich said the reason banks have to charge those fees in the first place is that they have to maintain expensive branches. While its partner banks may have branches, BankSimple customers don’t have access to them).

BankSimple also offers its customers thousands of fee-free A.T.M.’s, through the Allpoint network, primarily found in convenience stores and drug stores.

BankSimple aims to help you keep track of your money. For instance, in a demonstration posted by Mr. Reich on his blog, the site shows a “safe to spend” balance, as opposed to the “available balance” typically shown on bank sites. The “safe to spend” total takes into account pending transactions, coming bills and savings goals, rather than showing what’s in your account at that moment. The feature tells people what they really want to know when they check their balance, Mr. Reich said. “How much can I spend today without doing harm to myself tomorrow?”

Customers can use an emergency savings account to cover small overdrafts automatically. If they spend all their reserves and they don’t have enough money in their account for a purchase, the transaction is simply declined.

BankSimple also eliminates the need to go through the process of setting up different accounts for different savings goals. After you set up one account, you tell the site how much you want to save for, say, a vacation, and when you want to save it by, and the site will find the “best of breed” vehicles from its partner banks and allocate your money accordingly (with your permission) into, say, a high-yield interest-bearing savings account or laddered certificates of deposit.

The site also lets users ask simple financial questions. Say you are trying to find out what you spent at a meal last month in Portland, Ore., but can’t recall the name of the restaurant. You can type in “food last month Portland” and the engine will look up the name of the restaurant (Henry’s Tavern, in this case — Mr. Reich ate there) and the amount of the transaction. Mr. Reich said that by providing quick answers to naturally worded questions, the site could help reduce anxiety about money and help customers make better spending decisions.

The site has high expectations to meet, in part because its team includes one of the engineers who helped create Twitter’s technology platform. Meanwhile, BankSimple is moving headquarters from New York to Portland, where it is building a customer-service call center. But Mr. Reich said he did not expect the move to slow the site’s introduction.

Take a look at BankSimple’s demo and let us know what you think in the comments section.

Article source: http://feeds.nytimes.com/click.phdo?i=dc987ba330026098ea5b74b053b15337

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