Emphasis for L.A. Task Force Will Be on Securities Fraud : With Larger Staff, Justice Dept. Hopes to Whittle Backlog of Cases Here, Increase Prosecutions

The Justice Department’s newest anti-fraud task force in Los Angeles will focus on insider trading and other securities violations in Southern California and should significantly boost prosecutions of such cases, federal officials said Tuesday.

Although only three new assistant U.S. attorneys will be added in Los Angeles, that will boost securities fraud prosecutions here considerably because few attorneys are working on such cases now and there is a considerable backlog of cases awaiting action, said Robert C. Bonner, U.S. attorney in Los Angeles.

Bonner’s office has 10 prosecutors in its major fraud division, targeting securities, banking, commodities and other financial frauds. So three new people will represent a 30% boost, Bonner said.

The creation of the task force comes at a time the SEC’s regional enforcement office in Los Angeles has been suffering budget cuts required under the Gramm-Rudman deficit-reduction measure, reducing its staff and forcing it to institute a hiring freeze.

“We have been active, but not as active as we now hope we will be, in securities fraud,” Bonner said, noting that Los Angeles is second only to New York as a center for securities activity and thus deserves greater attention. The Los Angeles task force will focus on such securities frauds as market manipulation, insider trading and fraudulent financial statements submitted to the SEC, Bonner added. He said investigators and other personnel will also be added to the task force but didn’t yet know how many.

“The addition of a few extra people is a significant addition to that office’s ability to prosecute white-collar frauds,” said Irving M. Einhorn, regional administrator in Los Angeles for the SEC, which is expected to participate in the task force along with other state and federal agencies. “They have the cases to do; they just haven’t had the manpower to really do them.”

Einhorn said his office pursues about 30 cases annually through civil or administrative procedures, but only two or three of those can be prosecuted by the U.S. attorney’s office because of its limited resources.

The six task forces nationwide, announced Tuesday by U.S. Atty. Gen. Dick Thornburgh, will concentrate on the most complex and difficult frauds, including those involving precious metals and “parking” of securities to conceal their true ownership. The task forces will also deal with major bank and brokerage frauds, tax evasion, obstruction of justice and perjury, Thornburgh said.

But the Los Angeles-area task force will concentrate on securities frauds, Bonner said, because his office is already directing four other task forces aimed at frauds involving banks, savings and loans, bankruptcy filings and “boiler room” telephone sales operations.

The boiler room task force, in its three years of existence, has already obtained about 300 convictions--mostly involving Orange County boiler rooms--with sentences for perpetrators ranging as high as 25 years, according to Terree A. Bowers, chief of the U.S. attorney’s major fraud section in Los Angeles. Officials from numerous state, local and federal agencies also participate in that task force.

Bonner’s office has also stepped up efforts to prosecute large and complex securities cases. Most notable among those cases was that of Barry Minkow, founder of the ZZZZ Best carpet-cleaning firm in Encino, who was found guilty last year of securities violations.

‘Capital of the Nation’

Nonetheless, the Southland remains a hotbed of securities and commodities crime that shows few signs of abating.

Two key figures in Wall Street’s insider trading scandal, former brokerage chief Boyd L. Jefferies and “junk bond” guru Michael Milken, operated out of the Los Angeles area. Jefferies pleaded guilty to securities violations, while Milken is expected to be indicted soon on similar charges.

Orange County has been dubbed the “boiler room capital of the nation” because of the numerous fly-by-night operators who have set up shop in Newport Beach, Costa Mesa and other cities, hawking anything from bogus gold investments to fraudulent real estate deals.

The region also suffers from a high level of fraud at banks and savings and loan associations, cited by regulators as major reasons for growing failures of those institutions.

And investigators report signs of growing frauds locally among brokers selling “penny stocks,” low-priced securities whose prices are easily manipulated.

Hucksters are attracted because of the region’s high numbers of wealthy retirees who make easy targets. Salespeople are easy to attract because of the region’s good weather and other amenities.

Investigators also say shady operators assume that they can get away with frauds. They point to the low numbers of law enforcement personnel locally, relative to the size of the population in Southern California. Experienced government prosecutors often leave government jobs to go to the private sector, where they can often double their salaries. Government attorneys earn the same in Southern California as they do elsewhere in the nation, despite the higher cost of living here, the SEC’s Einhorn said.

High-Profile Cases Beneficial

Fraud is “such an enormous problem that almost no amount of resources will eradicate it completely,” said G. William McDonald, enforcement chief for the California Department of Corporations, which handles securities fraud cases for the state.

The prosecution of just a few more high-profile cases, such as that of Minkow and ZZZZ Best, could be beneficial as a deterrent to other crimes, officials said.

“The public awareness raised will make it a healthier environment,” said Dennis A. Klejna, enforcement chief at the Commodity Futures Trading Commission in Washington. “It’s kind of a ripple effect even with three lawyers.”

“It’s a welcome sign when the feds decide to devote more resources,” McDonald said. “Business fraud is a huge problem, and it doesn’t get the priority it deserves.”