West Coast SEC outpost shifts focus to large-scale inquiries. (Banking & Finance Special Report).

L.A. is still a Ponzi kind of town.

Sure, there's the occasional corporate accounting fraud, but when it comes to day-to-day affairs, Randall Lee, regional director of the Pacific Region for the Securities and Exchange Commission, said he's more likely to hear about boiler rooms or phony stock offerings. (Many of them are a variation of the tried-and-true Ponzi schemes, in which money paid by later investors provides inflated returns to original investors until the well runs dry.)

"If there is an investment fraud to be had, chances are it's probably being peddled in Southern California," he said.

Lee, interviewed last week at the SEC's regional headquarters in the Miracle Mile section of Los Angeles, wouldn't talk about specific companies. But he did discuss how the SEC's priorities have changed in the past year, acknowledging that the blur of corporate scandals and ensuing media coverage has had an effect on his staff.

"We're mindful of the public scrutiny," he said. "We're cognizant that in many senses there is a public cry for blood, properly so, but we're not going to get caught up in the hysteria."

Still, recent corporate scandals, including those of Home-store Inc. and Global Crossing, have affected the SEC's local operations, and higher profile accounting frauds have taken precedent over the high volume of petty scams.

"It all boils down to investor protection and maintaining the integrity of the securities markets," said Sandra Harris, associate regional director for enforcement in the SEC's Pacific Region. "Now, the number one priority is financial fraud perpetrated by public companies and their officers."

Under Lee's direction, the Pacific Region encompasses nine Western states, with about 140 staff members, most of them lawyers and accountants, in L.A. and another 75 in San Francisco.

The West Coast office has jurisdiction over nearly 2,000 public companies, not including public "shell" companies--those registered with the SEC but which are in essence defunct. Such shells can still be troublesome--private companies are merged into the public shells, their stock fraudulently pumped up and then dumped onto the market.

Both offices are evenly staffed between regulation and enforcement. (The SEC's division of corporate finance, which conducts routine checks of a company's public filings, is based in Washington.)

The regulation division, under Rosalind Tyson, associate regional director for regulation, directly regulates mutual funds, money managers, broker/dealers and transfer agents. Agents from the SEC regularly visit these entities to determine whether disclosure requirements are being met and that capital levels are maintained. That way, said Tyson, if an investment company goes out of business, customers get their securities and their cash back.

The enforcement side, headed by Harris, investigates allegations of securities laws violations. These cases usually begin informally, after the commission gets a tip. A decision to investigate is based on a slew of factors, Harris said, such as the number of investors affected and how recently an alleged violation occurred. Ongoing violations get higher priority.

The first step in the informal investigation is a request by the SEC for the company to volunteer information. But things can quickly escalate to a formal inquiry, in which it has authority to request internal documents and take written testimony.

"We cannot investigate and prosecute every instance of securities fraud that occurs, so we try to use our resources effectively to have the greatest impact possible," said Harris.

In taking on public company frauds, some have noticed a more vigilant SEC. "You see a much greater willingness to take a case from civil to criminal charges," said Dan Tyukody, a partner and head of the Los Angeles securities litigation practice at Clifford Chance USA LLP.

Armed with the newly passed SarbanesOxley Act, other local lawyers expect to see an even more vigilant SEC in the year to come.

"On an enforcement level, they're probably looking at a lot of issues more aggressively' said Michael Diamond, a partner and head of the litigation department in the Los Angeles office of Milbank Tweed Hadley & McCloy LLP.

If anything is reining in Lee and his staff, it's uncertainty over funding.

Harris is concerned that with increased scrutiny of a smaller number of companies, the agency might have a harder time tracking lower-profile, more pervasive abuses generally found in the West Coast office.

The SEC's local staffing levels have remained more or less constant for the past few years, Lee said, adding, "There is no question we could keep many more accountants and lawyers busy if we had the resources."

Congress has authorized a 77 percent budget increase for the SEC as part of the SarbanesOxley Act, although funds have not yet been appropriated, leaving its fiscal 2003 budget up in the air.

A supplemental appropriation from Congress earlier in the year enabled the local office to add a small number of accountants and lawyers, although not nearly as many as they could use, Lee said.

Back at the home office in Washington, the commission has been roiled.

Its former chairman, Harvey Pitt, resigned after it was found he withheld information that William Webster, his pick to head the SEC's new accounting oversight board, had served on the board of an Internet firm with accounting troubles. Webster, too, stepped down, and the new board remains in search of a leader.

Lee said the effects of SEC politics on the local staff have been minimal, but conceded that the Commission's ongoing troubles have been distracting at a time when investor confidence could use a boost.

"Because everything has to go through the commission, we can't just operate on our own," he said. "Having said that, there is a certain luxury to being 2,500 miles away from some of the politics and the other stuff that goes on."