- The Washington Times - Saturday, May 16, 2009

Two lawyers at the Securities and Exchange Commission, the federal agency responsible for overseeing the nation’s stock markets, are under investigation by the FBI for suspected illegal insider trading with information they obtained on the job, according to a report made public Thursday.

The report by SEC Inspector General H. David Kotz outlined how, over a two-year period, two enforcement attorneys purportedly traded stocks frequently, e-mailed relatives from work accounts, and in some instances, sold stock immediately before the agency started investigations into the companies.

The insider-trading probe comes as the SEC was already under fire on Capitol Hill for failing to uncover the $64 billion Ponzi investment scheme run by Wall Street investment adviser Bernard Madoff, despite being explicitly tipped off to Mr. Madoff’s scam years earlier by a whistleblower.

The new report, released by Sen. Charles E. Grassley, Iowa Republican, also found that the agency has “essentially no compliance system” in place to ensure that employees do not use the information they obtain through their work for their own trades.

The inspector general’s report was referred to the U.S. Attorney’s Office for the District of Columbia Fraud and Public Corruption Section, which since March has been conducting an investigation with the FBI.



“Improper trading by the very individuals charged with enforcing our federal securities laws cannot be tolerated,” Mr. Grassley, ranking Republican on the Senate Finance Committee and a frequent SEC critic, wrote in a letter to the agency Thursday.

The report by Mr. Kotz said the agency was tipped off by the two attorneys’ suspected frequent trading.

The attorneys - one male, one female - are accused of trading stock of a large financial company after being told by a co-worker that the company was being investigated. News of SEC action against a company can produce huge movements in its stock.

The report says that one of the attorneys under investigation also traded the stock of a health care company and bought shares of an oil company after an investigation began.

The attorneys worked together on their stock portfolios, according to e-mails obtained by the inspector general. Their names and the stocks they are accused of trading were redacted in the report.

They testified to investigators that they didn’t see anything wrong with e-mailing relatives from SEC accounts, despite rules against improperly sharing privileged information outside the agency. They told SEC internal investigators they did not engage in improper conduct.

The SEC said new Chairman Mary Schapiro has taken steps to “significantly improve” the agency’s compliance and employee stock-ownership programs.

“While the IG’s report neither accuses any SEC employee of insider trading nor concludes that any such conduct took place, we take seriously even the suggestion that any SEC employee would engage in insider trading,” a spokesman said.

“There are several steps already under way to enhance our protections against the potential for improper conduct,” the spokesman added, including developing an improved computer system to track trading by SEC personnel and hiring a chief compliance officer.

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