Watchdog Alleges Insider Trading At SEC
May 15, 2009
The Securities and Exchange Commission is back under fire after the agency's own watchdog alleged suspicious trading activity and possible insider trading by two staff attorneys.
SEC Inspector General David Kotz says he's referred his findings to the Department of Justice, which he says is investigating along with the Federal Bureau of Investigation. As is its standard practice, the DOJ would neither confirm nor deny they are looking into the matter.
The report, dated March 3, details a two-year investigation of two SEC enforcement staff attorneys who may have traded on non-public information or engaging in insider trading in stocks of companies under investigation by the agency.
The pair, along with another SEC attorney, are accused of violating agency rules governing the reporting of personal stock transactions, according to the inspector general's report. There appeared to be a lack of concern about the appearance of the conduct in question, the inspector general says.
Perhaps more damning, the report describes an agency without an overarching compliance system to monitor such activity, and employees who either misunderstood or didn't follow existing reporting rules.
"Although the SEC through its law enforcement function is charged with prosecuting cases of violations of securities laws, including insider trading on the part of individuals and companies in the private sector, the commission has essentially no compliance system in place to ensure that commission employees with the tremendous amount of non-public information they have at their disposal do not engage in insider trading themselves," Kotz writes in his report.
"We take seriously even the suggestion that any SEC employee would engage in insider trading," SEC spokesman John Nester said late Thursday. "We note that the IG's report neither accuses any SEC employee of insider trading nor concludes that any such conduct took place." Nester told Forbes that both attorneys are still working at the agency.
The investigation, first reported Thursday evening by CBS News, comes as the SEC faces renewed criticism for its failure to detect Bernard Madoff's $65 billion Ponzi scheme before it imploded last December, not to mention failing to stop the excesses of the last five years that derailed Wall Street.
The SEC is supposedly Wall Street's watchdog. Sen. Charles Grassley of Iowa, the ranking member of the Senate Finance Committee, demanded answers from the SEC about its response to the inspector general's report in a letter Thursday.
"It's hard to imagine a more serious violation of the public trust than for the agency responsible for protecting investors to allow its employees to profit from non-public information about its enforcement activities," Grassley says in the letter, asking the SEC to brief him by the end of the month.
The trading conduct investigation started in January 2008 and covered the previous two years. One of the main subjects was an unnamed female enforcement attorney who allegedly spent a great deal of time during working hours, using SEC computers, e-mailing colleagues about stock picks and studying stocks.
The report, which blocked out the names of the employees and the stocks in question, says the female staffer traded 247 times during the period investigated (more than two trades a week), admits to a "keen interest" in the financial markets and held as many as 60 individual stocks worth as much as $170,000. By October 2008, the portfolio dwindled to 50 stocks worth $45,000.
She and a male colleague would frequently meet for lunch and e-mail each other and other colleagues about stocks, the report says. The male attorney e-mailed stock recommendations to his family using his SEC e-mail account, not believing that could be misconstrued as passing on potentially non-public information.
It was their trading in the stock of a large financial institution at a time when the SEC was running multiple investigations of the company that got referred to prosecutors, the report says. The existence of the investigations was discussed at lunch and in e-mail between them and a third staffer, according to the testimony of the third. "We find those facts raise at least an appearance of an impropriety," the report says.
Nester said the SEC has taken additional steps to enhance protections against "the potential for improper conduct," including developing a new computer system to facilitate reporting and review of securities trading by all SEC personnel, hiring a chief compliance officer and providing greater clarity of rules governing the reporting of trades.
Kotz has called his agency to task before, harshly criticizing the SEC's handling of an insider trading case being prepared by former staff attorney Gary Aguirre.
Aguirre says he was fired in 2005 for trying to pursue that case, which involved a major investment bank and prominent hedge fund, by interviewing a powerful Wall Street chief executive. The SEC then tried to cover up its reasons for firing him, he claims. An investigation into Aguirre's claims by Kotz concluded last year and sided with Aguirre's version of events.
In an e-mail Friday, Aguirre says the latest inspector general report was "not surprising: It would be the next logical step in the SEC's mission reversal: from protecting investors to protecting Wall Street. In a culture that tolerated Wall Street's insider trading and overlooked Madoff's Ponzi scheme, some staff attorney was bound to ask: Why not me?"
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