Bates News,Bates Research - 06-26-20

Bates Practice Leadership Insights: Regulatory Investigations Now and on the Horizon

Bates continues our practice leadership conversations this week with Alex Russell, Managing Director of Bates’ White Collar, Regulatory and Internal Investigations Practice. Alex’s team supports corporations, financial services firms, law firms and regulators by bringing technical, big data analytics and managerial expertise to a variety of disputes and investigations. He also co-leads Bates’ big data analytics service and manages matters involving the assessment of economic damages. We asked Alex about regulatory investigations, big data and the issues firms and their legal counsel are currently concerned about. Here is a recap of our conversation.


Question: How has the pandemic affected your clients right now?

Generally, I would say that firms are under considerable and increasing pressures created by market uncertainty. The added pressures come not only as a direct consequence of market declines and volatility, but also from the way that regulators, customers, employees and even litigants react to it—often exacerbating problems by layering on top their own concerns and urgencies. Add to that the very real challenges of working remotely (including issues as disparate as cybersecurity and childcare), and it is fair to say that our clients are operating in a very difficult environment. The top concern that I hear, from nearly everyone, is that there are just not enough hours in the day to get done what needs to get done.

Let’s talk first about regulatory investigations. Do you expect an uptick in investigative activity as a consequence of this market volatility?

Absolutely. But this should not be a surprise. The regulators have been very vocal, in public and private, that they are minding the store and fulfilling their oversight and investigative responsibilities. And they are intent on proving it. At Bates, we are already seeing an uptick in such regulator activity, but as with prior market dislocations, we should adjust our expectations and prepare for these current regulatory investigative priorities to play out over the next several years.

Can you be more specific? What sort of regulatory enforcement matters, for example, should we expect?

Some are very easy to see coming; anything involving leverage for example, whether in the form of margin, the use of options, or leveraged ETFs / structured products themselves. We’ve had ascending markets for so long that leverage has become a normal part of the market again, and may have even been extended into areas that the regulators will deem inappropriate. Fraud claims will also rise, from penny stock’s touting COVID-19 vaccines, to individuals running Ponzi like schemes that are exposed when new investments dry up. Uncertainty creates an opportunity for many different types of fraudsters to take advantage of that confusion to the detriment of investors. The increased pressure on reps to try and sustain the income level they need will tempt some to bend the rules in ways that are sure to prompt action. It seems unlikely that the regulators will stop pursuing the fee-based actions (12b-1, 529, revenue sharing) that they have been pursuing over the last few years, so I expect those to continue as well. We’ve handled well over 30 of those types of investigations and claims for our clients, and we have not seen any indication of those slowing down at all. The list goes on.

What is the outlook in the white collar space?

Market manipulation schemes, in particular penny stock pump-and-dump schemes will show up quite regularly, and have already started to do so. Similarly, insider trading allegations around the use of material non-public information will be a source of steady activity, in addition to many of the same actions (fraud, for instance) that will also be the target of regulatory scrutiny. We’ve been steadily working on insider trading, and market manipulation matters even more so, pre-COVID-19 and expect to handle quite a few more after this. Interestingly, many of our recent pump-and-dump matters have been in a criminal rather than civil context, I am curious to see if that trend reverses itself or if the pandemic will accelerate the trend of criminal indictments.

How will big data shape this conversation?

The analysis of big data will play a critical role in helping to resolve many of the issues being raised. Since these issues will cut across firms as a whole, the analysis would be infeasible without the use of big data. Many of the regulators are already reporting sharp increases in the alerts being generated by big data analysis for market surveillance. For instance, FINRA noted a 200% increase in alerts around best execution, wash sales, spoofing, and layering. Regulators are using the tools of big data analysis to “spot risk bubbling up,” and those same tools can help firms identify risk internally, conduct their own investigation and analysis, and resolve the underlying issues. Big data will be a critical part of identifying what will show up when Regulators examine firm behavior, and in responding to claims made by the regulators on the basis of big data analysis. Enforcement actions will likely intensify as a result of these developments.

In many cases, we have taken on large-scale investigations by serving as a critical external resource for big data and analytics assignments. This lets our clients’ internal personnel focus their resources on their essential, day-to-day tasks.  Since the onset of COVID-19, we have also been asked to provide insight into peer practices and to collate trend information gathered through interaction with the regulators. This has been positively received by our clients, who feel forearmed with useful information prior to interacting with regulatory staff.  Clients appreciate being able to speak with our staff knowing that they have dealt with the same or similar issues on behalf of other clients, and that we have the technical skills to perform efficient, accurate, and insightful quantitative analysis. That combination of skills and awareness of how the regulators are treating certain issues has allowed us to assist counsel in delivering positive outcomes for their clients.

What final thoughts are you offering to clients at this time?

First, work diligently to maintain your pre-pandemic compliance processes and procedures, and document your efforts. Second, keep up with regulators’ current expectations of firm practices. To the extent possible, talk to peers and counterparts in other firms to find out what they are seeing, what is working and what isn’t. Third, review the available data out there and do what you can to form an accurate picture of how the industry is responding to the challenges this crisis has created. Finally, use all available information to forecast developing trends so you can spot the opportunities and avoid the pitfalls.


The current crisis presents many challenges. Bates practice leaders, consultants, and experts can help. Please contact:

Alex Russell, Managing Director, White Collar, Regulatory and Internal Investigations

Edward Longridge, Managing Director, Bates AML and Financial Crimes 

Christine Davis, Managing DirectorForensic Accounting & Economic Damages

Dennis Greenberg, Managing Director, Third Party Risk Management Services

You may also be interested in:

Bates Practice Leadership Insights: What Compliance Officers are Thinking About Now

Bates Practice Leadership Insights: What AML Officers are Thinking About Now

Don't miss our Webinar July 9, 2020: Regulatory Exams and Investigations in the Age of COVID-19. Presented by Bates Group and Eversheds Sutherland.

Click Here to Register for this Zoom Webinar


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