SEC collects Wall Street's private messages as WhatsApp probe escalates -sources

Citadel Income Fund

25/09/2023 11:00

By Chris Prentice, Carolina Mandl
       NEW YORK, Sept 25 (Reuters) - The U.S. securities
regulator has collected thousands of staff messages from more
than a dozen major investment companies, escalating its probe
into Wall Street's use of private messaging apps, said four
people with direct knowledge of the matter.
    Previously, the Securities and Exchange Commission (SEC) had
asked the companies to internally review the messages in its
investigation of Wall Street's use of WhatsApp, Signal and other
unapproved messaging apps to discuss work.
The two-year crackdown into potential breaches of record-keeping
rules initially targeted broker dealers, netting regulators over
$2 billion in fines.
     While Reuters and other media have reported that the SEC's
"off-channel" communication probe has 
    expanded to investment advisers
    , its move to review thousands of their staff messages has
not previously been reported. It marks an escalation of the
investigation and raises the stakes for the companies and the
executives concerned by exposing their conduct to SEC scrutiny.
  
     "It increases risk," one source said. "The more information
you give the SEC, the more you fuel the beast." 
  
In the latest phase of the probe of more than a dozen investment
advisers, the SEC has in recent months asked for messages on
personal devices or applications during the first half of 2021
that discuss business, the sources said. It has targeted a
selection of employees, in some cases as many as a dozen,
including senior executives.
    The firms include Carlyle Group  CG.O , Apollo Global
Management  APO.N , KKR & Co  KKR.N , TPG  TPG.O , and
Blackstone  BX.N , according to three people with direct
knowledge of the matter, as well as some hedge funds, including
Citadel, said a different person with direct knowledge.
    The executives gave their personal phones and other devices
to their employers or lawyers to be copied, and messages
discussing business have been handed to the SEC, three people
said.
That is in contrast to the broker-dealer probes. In those cases,
the SEC asked companies to review staff messages and report to
the agency how many discussed work. SEC staff reviewed only a
sample of messages themselves, according to three sources with
knowledge of the previous investigations. 
    The sources spoke on the condition of anonymity because SEC
investigations are confidential.
    At least 16 firms including Carlyle, Apollo, KKR, TPG, and
Blackstone, have disclosed that the SEC is probing their
communications. The firms did not provide further details and
did not comment for this story. A spokesperson for Citadel
declined to comment.
     Government investigations are not evidence of wrongdoing
and do not necessarily lead to charges. 
     An SEC spokesperson declined to comment. Chair Gary Gensler
has defended the communications scrutiny, saying record-keeping
rules are critical in helping the SEC guard against wrongdoing.
     "Now that they have all that data - it is very possible
that the SEC will find compliance failures in there somewhere
that have nothing to do with the off-channel communications
record-keeping issues," said Jaclyn Grodin, a lawyer at Goulston
& Storrs who is not involved in the investigation.
Private fund fees and expenses, conflicts of interest and
preferential treatment of investors are issues the SEC is
increasingly focusing on, she noted.
     
    'SHOOTING FISH'
    The problem of keeping tabs on staff communications has
dogged Wall Street compliance departments for years. Because
companies do not surveil personal messaging channels, using them
to discuss business puts SEC-regulated employers in breach of
requirements to record all business communications.
The SEC began to home in on Wall Street's record-keeping problem
when JPMorgan Chase  JPM.N  failed to provide documents from at
least 2018 pertaining to an unrelated probe, according to a 2021
settlement in which the bank agreed to pay the SEC $125 million
to resolve charges over record-keeping lapses.
Suspecting that off-channel chat about deals, trades and other
business was rife on Wall Street, the SEC in 2021 opened an
inquiry into other broker-dealers' communications, said two
sources. The misconduct proved so pervasive that the agency has
been "shooting fish in a barrel," one said.
    The probe is shaping up to be Gensler's signature Wall
Street enforcement initiative, netting multiple big names
including Wells Fargo  WFC.N , Bank of America  BAC.N , Goldman
Sachs  GS.N  and Morgan Stanley  MS.N. .
    It has generated millions in fees for attorneys, with firms
hiring dozens of lawyers to represent both the company and
executives worried about their exposure, according to several
sources.
     
    'INVASIVE'
The SEC began approaching investment advisers in October 2022,
Reuters previously reported. As with broker-dealers, the SEC
initially sought details on investment advisers' record-keeping
policies. It then identified a group of executives and asked the
firms to search their devices and report back on what they
found.
    But the firms resisted, arguing their record-keeping
requirements are narrower than broker-dealers'.
    In a January letter led by the Managed Funds Association,
the industry said the SEC's request was "invasive" and raised
privacy issues. Bloomberg previously reported the letter.
The SEC later demanded that the investment advisers hand over
the messages, the sources said.
     The agency is ignoring important differences in investment
advisers' recordkeeping requirements, said Jennifer Han, the
MFA's executive vice president and chief counsel.
  
     "Unilaterally expanding the rules by enforcement actions
sidesteps due process and creates a dangerous precedent," she
said in a statement.
  

(Reporting by Chris Prentice and Carolina Mandl. Editing by
Michelle Price and Marguerita Choy)
((mailto:christine.prentice@thomsonreuters.com; +1 (202)
843-6464;))