Canellos Speaks to TNH about SEC Tenure

NEW YORK – Last week brought to a close four-and-a-half years of dedicated and distinguished service to the Securities and Exchange Commission (SEC) by George Canellos, co-director of its Enforcement Division.

Canellos and his colleagues undertook no less a task than the restoration of faith in the U.S. financial industry in the wake of the Madoff and housing market scandals and the financial crisis of 2007–2008.

Part of the job required Congress to make changes in the laws that regulate the industry, and part entailed prosecution of those who committed crimes under prior laws. The latter required the judiciousness and intellect Canellos’ career reflected from the start.

“George is highly respected for his intellect, prosecutorial instincts, and commitment to tough and fair enforcement of the federal securities laws,” said Robert S. Khuzami, Director of the Division of Enforcement when Canellos was appointed Acting Director of the SEC’s Division of Enforcement in 2013.

He earned a JD from Columbia University School of Law and graduated magna cum laude from Harvard College. Before joining the SEC Canellos was a litigation partner in the law firm of Milbank Tweed Hadley & McCloy.

Prior to that he served nine years as a federal prosecutor with the U.S. Attorney’s Office for the Southern District of New York. He was chief of the major crimes unit, deputy chief of criminal appeals, and senior trial counsel for its securities and commodities fraud task force.

After being named director of the SEC’s New York office, Mr. Canellos was instrumental in its response to the revelation of the Bernard Madoff Ponzi scheme, overseeing investigations and fraud charges against 22 individuals and entities.

PARENTS: AIM HIGH AND MAKE A DIFFERENCE

He is one of the many individuals, the children and grandchildren of immigrants from Greece and Cyprus, who have risen to the top of every profession, but he belongs to that subset whose families who not only pointed them towards success, but also inculcated integrity and the burning desire to make a better world.

His father George is a hematological oncologist, a blood cancer specialist and his mother Jean is a former science teacher.

Flexibility and grasping subtlety and a keen intuition for the consequences of actions seem to also be in the genes. His older brother is the editorial page editor of the Boston Globe and his younger brother is an internet marketing consultant.

Attorneys will note that it is relatively easy to handle cases in which bad guys are engaged in unquestionable bad acts, and government officials know that regulation is simple if all it entails is identifying major fraudsters.

What the SEC does entails making decisions on whether conduct violated the law and about whether or not to bring legal actions.

Asked about Republican concerns about “over-regulation” of a vital American industry, Canellos told The National Herald “if you too easily  pull the trigger, it does present concerns…So when you regulate as opposed to prosecute, you are dealing with a large field that to some extent involves more morally ambiguous conduct,  as opposed to out and out fraudsters.”

It is like Goldilocks’ choosing soup that was not too hot or cold. “The decision to prosecute has to be just right,” he said.

“You want to be extremely judicious. I think the job of an enforcement attorney at the SEC is 60 percent judicial and 40 percent prosecutorial….many times we are acting as judge in the sense that we are not going to court necessarily. We know if we bring the case, we will get a settlement and will be able to secure a penalty and the question is, ‘should we,’” he explained.

“Typically we have a very robust process of dialogue with those who are the subjects of our investigation and internally and with the commissioners who ultimately approve enforcement action…in which we discuss the law and the policy issues presented,” he said.

In deciding whether to bring an action for certain conduct, Canellos and his teams, whose talent and hard work he deeply appreciates, would ask “what would be the consequences and how would investors or other participants in the market react? There is an overlay of policymaking in exercising our prosecutor discretion.”

He emphasized that, “Our principle goal in enforcing our securities laws is to deter violations.”

According to an SEC press release, Canellos’ achievements include “The action against former McKinsey & Co. global head Rajat Gupta for illegally tipping Rajaratnam while serving on the boards of Goldman Sachs and Procter & Gamble.”

WHAT’S WRONG WITH A STOCK TIP?

Given that many citizens would consider themselves fortunate to receive a stock tip from a friend or relative, TNH asked Canellos to illuminate the shady issue.

“Insider trading is a form of fraud, which is deceiving people…for there to be insider trading there must be a relationship of trust and confidence,” he said.

“If you are the insider trader you have to obtain the information from someone, who could be your employer, with whom you have a relationship of trust or confidence. Or it could be a private agreement, or another party to which you owe a fiduciary duty, like a lawyer working for a client. When a client give you information, the implicit understanding is that you are the receiving information…as part of the attorney-client relationship, or you are an employee that is getting information from your employer …and using it solely for the benefit of the person who owns that information and provided it to you,” Canellos continued.

In such cases, the person is “making the implicit representation as someone’s employee that he will keep that information tight…if secretly you are acting for yourself by taking valuable information that belongs to someone else …and using that information, or gifting that information for the benefit of a friend or a cousin or someone else, you are committing a form of fraud because you are really deceiving someone through the nature of your relationship with them. You are betraying the trust you know they have placed in you.”

“If your friend gives you a tip, you are liable if you knew or should have known that the friend obtained the information in such a fraudulently way,” Canellos said. “It gets more challenging when you are not directly using information that someone like your employer gave you but are acting on a tip your friend gave you,” he said.

Asked about a murkier situation, where someone’s contact is just acting on a hunch based on behavior he observed, Canellos said a case is now pending that some people contend is like that.

“Generally speaking, if you are getting information that is not accessible to the public and you are getting it only by virtue of your employment at a company, and that information has value, you are not supposed to use it… if by inference you have figured some things out because you are observing things the rest of the public doesn’t observe and is only available to you because you work at the company, you are not supposed to use that for trading,” he said.

“Information that a reasonable investor would not consider important is not actionable…Many reasonable investors would consider it important that a bunch of people in suits with investment bankers have shown up at the company headquarters and seem to be taking an inventory of all the employees and assets, because that could be consistent with a company being about to be taken over – but that becomes an argument in court on the margin,” Canellos said.

He agreed that the commercial principle with the ethical dimension is the importance of level playing fields for a market economy to properly function.

Enforcement actions supervised by Canellos also included “Actions against Raj Rajaratnam and more than 30 others associated with New York-based hedge fund advisory firm Galleon Management LP for widespread and repeated insider trading… and “Actions against hedge fund managers associated with S.A.C. Capital for perpetrating the most profitable insider trading scheme in history and against S.A.C. Capital’s founder Steven A. Cohen for allegedly failing reasonably to supervise those fund managers.”

Hedge funds are still a mystery to most people despite widespread publicity. Canellos pointed out that “Clearly there are some hedge funds that have problems and some that don’t…I don’t think anyone would suggest that the whole hedge fund industry is corrupt.”

Canellos was born in Washington, DC and lived there for all the first ten years of his life except for one year when his father took the family to London, which was then a leader in cancer research.  Both his parents are Greek-Americans from Boston and there was always a plan to return. They moved to the Boston suburb of Weston when he was 10.

Canellos was named after his maternal grandfather, who c hanged his last name from Speronis to Speare, hence he is George Speare Canellos.

His grandfathers were born in Greece and his grandmothers in the United States of Greek-born parents. “Every one of them, going back to the beginnings of time, are Peloponnesians,” he said, a proud smile surely on the other end of the telephone line.