Friday, May 15, 2009

SEC Attorneys Under Investigation for Insider Trading

Two enforcement lawyers at the Securities and Exchange Commission are under investigation by the FBI for possible insider trading based on non-public information that came into their hands as SEC employees.

According to NYT, a female SEC enforcement attorney:

...was found to have spent much of her workday sending e-mail messages and scouring the Internet for information about stocks

And a male SEC attorney:

sent stock tips — sometimes from the female lawyer — to his brother and sister-in-law from his agency e-mail account.

NYT continues:

While it is not known how senior they were, the report says both have worked at the S.E.C. for “many years” and each made a salary of more than $167,000 a year.

A third lawyer in the enforcement division was found to have violated reporting requirements, but the inspector general found that her behavior “did not raise any concerns or suspicions about possible insider trading.”

The two lawyers under scrutiny for insider trading bought and sold stock of a financial services company after the third lawyer informed them of three separate investigations of the company.

UPDATE More from WSJ:

A report by the SEC's inspector general described multiple suspicious cases where the lawyers traded the stocks of companies around the time the companies were under investigation. The report concluded the lawyers had violated the agency's internal rules, and the case was taken up by the U.S. attorney's office in Washington, D.C., and the Federal Bureau of Investigation.

The report didn't identify the employees. One, who the report said had been with the SEC since 1981, is a female staff lawyer...The report said the other is a man who works in the enforcement division's chief counsel office, a key position that vets all cases, ensures consistency across the division, and often offers advice to attorneys.

The two plus another enforcement lawyer had a "standing lunch" on Monday where they often discussed stocks and financial markets, according to the report. It said one made more than 200 trades over two years...

The partially redacted inspector general report said the SEC has "essentially no compliance system" to detect potential insider trading. It said the agency didn't conduct spot checks on trading and the various offices that received trading reports didn't share information. The report recommended disciplinary action against the two employees, who both continue to work for the agency...

The female attorney under investigation was said to have traded 247 times from January 2006 through January 2008. The inspector general found that the woman hadn't received clearance from the ethics office for 10 of the 247 transactions...

Her male colleague owned about 15 to 20 stocks valued at about $150,000 when he testified to the inspector general in October, and traded 14 times over the same period, the report said. It said he told investigators he didn't keep a list of matters he has reviewed in the chief counsel's office. He maintained that while he did discuss stock picks with his brother, he didn't share nonpublic information with him, the report said. "My heart is pure," he told the inspector general.

The implications here are extremely serious. Unlike private citizens who trade on inside information, SEC enforcement attorneys have the ability to dramatically influence the prospects of a company as a result of their power to begin or halt an investigation. The possibility that some enforcement agents took positions or sold positions while investigations were on going is very alarming.

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