“Culture of Compliance” Won’t Always Stop Fraud
April 9, 2014 Leave a comment
March 27, 2014, 7:07 AM ET
“Culture of Compliance” Won’t Always Stop Fraud
Matt Keel, chief compliance officer at investment firm Sentinel Management Group Inc., said at the trial of the firm’s chief executive Eric A. Bloom that he still believed his former boss to be “an honest person…with high integrity.” Mr. Keel, according to prosecutors, had previously lauded Sentinel’s “strong culture of compliance” in a report.
Mr. Bloom was convicted on Tuesday of defrauding customers out of $500 million via a misuse of their funds that Mr. Keel didn’t know about at the time, according to his testimony. Terry Campbell, a lawyer for Mr. Bloom, said he would ask the judge to overturn the verdict and intends to appeal. Mr. Keel isn’t the first compliance officer at an investment firm to be embarrassed by the conduct of the boss: Russell Wasendorf Sr., who is currently serving jail time for fraud, fabricated documents that misled his chief compliance officer and many others besides.
How can compliance officers catch such deception? Sen. Debbie Stabenow, in a hearing on the Wasendorf fraud held in 2012, suggested attention to internal controls might have provided early warning of that fraud. What is “the trust but verify position…from a customer standpoint, what is the verification? What is the independent verification?,” she asked Dan Roth of the National Futures Association. Mr. Roth, president of the self-regulatory body, responded by outlining additional safeguards the NFA planned to make. Otherwise, at least compliance officers at investment advisory firms can expect some backup from the government, after a first-of-a-kind case last August in which the Securities and Exchange Commission punished an adviser for deliberately misleading his CCO.
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