Just as Bernie Madoff seemed to be gracing fewer front pages, the Securities and Exchange Commission’s inspector general dealt another blow to the agency’s lawyers. According to a report from the IG, dated March 3rd, but released yesterday, one lawyer in the division of enforcement and one in the chief counsel's office are being investigated by the FBI for possible insider trading.
Perhaps even more embarrassing, the report finds that there is "essentially no compliance system in place" to ensure that SEC employees are not trading on non-public information.
CBS News first reported on the investigation. The full report is available here.
The report focuses on three lawyers, all of whom the inspector general says violated SEC securities reporting requirements, but only two of whom are being probed for insider trading. All three names were redacted from the report. The two under investigation for insider trading are referred to as a male and a female, and identified respectively as #1 and #2. The third lawyer, #3, is identified as a female.
According to the report, #2 sold all of her shares of stock in "a large health care company" about two months before her group opened an investigation into the company.
At the very least, the report offers an interesting peek at how the lawyers were allegedly spending their days. It finds that lawyer #2 "spent much of her work day e-mailing and searching the Internet about stocks." Lawyer #1 "sent e-mails to his brother and sister-in-law from his SEC e-mail account during the work day recommending particular stocks, and sometimes informing them that #2 had recommended those stocks as well."
Lawyers #1 and #2 both deny engaging in any improper conduct, according to the report. #2 testified that following the financial markets is her "main hobby," adding, "It’s my way of keeping intellectually above what other people are doing."
After concluding that the SEC does not have a sufficient means of monitoring its employees’ trading practices, the IG is also recommending 11 steps the commission should take to prevent insider trading. The recommendations include establishing a single primary office to monitor securities transactions.
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