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The Securities and Exchange Commission (SEC) is conducting a probe into whether two of its employees were involved in an insider trading scheme.
According to The Wall Street Journal: "Federal prosecutors are investigating whether two Securities and Exchange Commission enforcement lawyers violated insider-trading laws, a potential scandal at an agency normally the pursuer in such cases."
Citing "a report by the SEC's inspector general" The Journal described a situation in which "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 names of the two lawyers under investigation have not been made public. What is known is that "One, who the report said had been with the SEC since 1981, is a female staff lawyer, according to people familiar with the matter. 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."
There is, however, a potential mechanism for the situation that is been explored, as "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." According to the Journal, despite the probe, the leap into a criminal investigation may take some time, and may never come about, as "Violating internal SEC rules wouldn't necessarily be illegal or criminal. To become illegal insider trading, the transactions would have to involve the use of nonpublic material information. The report said that the two denied any wrongdoing."
Furthermore, there are lots of unanswered questions at this point, such as "how much profit, if any, the SEC lawyers might have gained." The Journal also noted that "The FBI investigates many such cases without ever bringing charges."
What is apparent is that "The investigation is another potential hit to the reputation of an agency that is responsible for ensuring the probity of financial markets. It has drawn criticism for missing red flags that could have led it to uncover the giant Bernard Madoff Ponzi scheme."
The Journal also noted the following, which is alarming, the SEC's "future is in question, with Congress and the Obama administration weighing ways to revamp financial regulation."
According to the Journal, citing the report which was initially reported by CBS News, '"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 SEC is now hiring a compliance officer and retooling its computer system to detect any infractions. According to The Journal: "SEC rules prohibit employees from buying shares of any company they know is under investigation. Employees have to hold any shares they do buy for at least six months. They are barred from short sales -- selling borrowed stock in a bet its price will fall -- and from trading futures or options. Any trades employees make have to be reported to the agency's director of personnel within five business days. The report said the SEC doesn't have someone in that position but that there is an associate executive director in Human Resources. It said several SEC employees were unfamiliar with the rules or misunderstood them."
The report added that there were several instances which raised questions about the two lawyers. The female lawyer made nearly 250 stock transactions from 2006 to 2008, revealing "suspicious activity, appearances of improprieties, and evidence of possible trading on nonpublic information, and/or potential insider trading."
The male lawyer sent e-mailed stock recommendations to relatives on government computers. According to The Journal: "A third employee, a woman who also attended the weekly lunch, bought stock in a large financial-services company in August 2005 after receiving clearance from the ethics office, according to the report. She later learned there were at least three open investigations into the company, the report said, adding that she told the inspector general she had shared this information with her colleagues at lunch and by email. The report says the other two owned the stock at some point but doesn't say when. The two deny having been told of the investigations, the report said."
Conclusion
The phrase "close enough for government work" suggests that government employees aren't exactly motivated by the need for perfection. It also implies that government employees, feeling secure in the fact that they have power behind them often skirt the rules and use their position to their advantage.
To be sure, taking advantage of a powerful position is part of the dark side of human nature.
Yet, at a time when "Ponzi scheme" is the subject of dinner talk for families that aren't particularly savvy about investments, the fact that at least two and maybe more SEC lawyers are being investigated for alleged insider trading, suggests that maybe where there's smoke there is fire.
Here is a plausible, and clearly hypothetical scenario. If two SEC lawyers were involved in insider trading, who's to say that others may not have been involved in something more, like perhaps bribery/kickback schemes. One such instance, involving the hedge fund past managed by Obama's car Czar and the New York State pension system is currently ongoing.
History shows that government scandals can be like cockroaches. When you see one, it means that thousands of them are likely lurking where you can't see them.
For investors, it just means that the potential for more market volatility is possible. More important, though, is that as each one of these instances appears, the public's confidence in investing erodes further, and that the government uses the situation as an opportunity to increase regulation on the system.
At some point, investing in stocks won't be worth the trouble and effort that responsible investors put into it.
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