Yesterday POGO published an article in Politics Daily which revealed that George Demos, a former Securities and Exchange Commission (SEC) attorney who is now running for Congress, was previously cited in an SEC Inspector General (IG) report for improperly disclosing protected, nonpublic information about a whistleblower from JPMorgan.
Demos, who is touting his experience at the SEC on his campaign website, has repeatedly denied any wrongdoing. But documents obtained by POGO have confirmed that Demos was the focus of the IG’s investigation, which concluded that he violated SEC rules prohibiting the disclosure of confidential information received in the course of an investigation. The IG referred the case to the SEC for disciplinary action up to and including dismissal, but the agency took no action. Shortly after the IG report came out, Demos resigned from the agency and announced that he was running for office.
Unfortunately, Demos’s improper disclosure is just one of many examples of the SEC dropping the ball with whistleblower tips. As described last week by Zachary Goldfarb at The Washington Post, the SEC also failed to heed the warnings of Harry Markopolos, who came to the agency with detailed evidence of Bernie Madoff’s Ponzi scheme, as well as a Moody’s executive who tried to warn the SEC that his credit rating agency was giving high ratings to investments that it knew were dangerous. The SEC has pledged to overhaul its whistleblower intake system, but progress has been painfully slow.
Meanwhile, the SEC has also been regularly ignoring the findings and recommendations of its own IG, and not just in the Demos matter. Last month we sent a letter to SEC Chairman Mary Schapiro criticizing the agency for its sluggish response to hundreds of recommendations made by the OIG over the past two years.
The JPMorgan whistleblower, a compliance officer named Peter Sivere, had come to the SEC in June 2004 with evidence that his employer was failing to provide materials sought in a wide-ranging SEC probe into an investment practice known as market timing, which typically involves trading that favors short-term buyers and sellers to the detriment of long-term investors such as retirees. In his initial email to the SEC, Sivere asked if he would be eligible for a program created by the Securities and Exchange Act that offers rewards to whistleblowers who come forward with information about insider trading. After he was informed that he would not be eligible, Sivere did not raise the issue again, and provided the SEC with the information anyway just a few weeks later.
In July 2004, Sivere filed a complaint with the Occupational Safety and Health Administration (OSHA) under the whistleblower protection provision of the Sarbanes-Oxley Act, alleging that JPMorgan retaliated against him after he expressed his concern that the bank was withholding documents from the SEC. After OSHA issued a preliminary finding in Sivere’s favor, JPMorgan’s counsel responded with an attack on Sivere’s whistleblower credentials, noting that the “SEC has also advised [JPMorgan] that Complainant sought payment from the SEC for providing the SEC with documents.” Once Sivere became aware of this response, he realized that someone at the SEC had improperly informed JPMorgan’s counsel about his initial inquiry into the SEC’s whistleblower bounty program. This revelation led to the IG’s investigation, which eventually identified Demos as the source of the disclosure, and concluded that he “not only gave...JPMorgan permission to use the non-public information about an informant against him, but actually encouraged such use.”
Sivere has also filed a complaint against Demos before the Departmental Disciplinary Committee of the New York State Supreme Court Appellate Division, which reviews ethical complaints against lawyers and can impose penalties ranging from censure to disbarment. Only days after he announced his candidacy, Demos sent a two-page letter to the Disciplinary Committee conceding that information about Sivere “may have been necessarily disclosed by the Commission’s [SEC] staff,” but only in accordance with SEC rules. He also claims that Sivere “was owed no duty of confidentiality or loyalty by the Commission or me.” However, the IG’s report makes clear that the disclosure of this information was anything but necessary, and was in fact a violation of SEC rules requiring that the information be kept confidential.
As we pointed out in our press release, the Demos episode demonstrates why there is such an urgent need for culture change at the SEC. POGO wrote to President Obama earlier this week urging him to instruct Chairman Schapiro to make it a top priority for the SEC to take swift and decisive action on the IG’s outstanding recommendations, many of which would help to address the long-standing systemic problems that have hindered the agency’s effectiveness. In particular, POGO calls on the SEC to send a strong message of support to future whistleblowers by following the IG’s recommendations for improving the agency’s handling of insider tips, and by cracking down on any employee who is responsible for whistleblower retaliation.
-- Michael Smallberg