5 Notable Excerpts from the Unposted SEC IG Reports

By Michael Smallberg

Last week, POGO unveiled a resource page with over twenty investigative reports by the Securities and Exchange Commission (SEC) Office of Inspector General (OIG) that you won’t find anywhere on the websites of the SEC or OIG.

The OIG has summarized these reports, often in great detail, in its semiannual reports to Congress, and many of these investigations have already been disclosed by the media and Congress. We’ve also covered many of these investigations on our blog. Nonetheless, we thought we’d highlight some of our favorite excerpts from the full unposted reports, which detail a wide range of troubling misconduct at the SEC over the past few years. 

Here are our five favorite excerpts, in no particular order: 

1. SEC official gets cozy with contractors

From Conflict of Interest, Improper Solicitation and Receipt of Gifts from a Prohibited Source, Misuse of Official Position and Other Misconduct (OIG-469), June 5, 2008:

The OIG investigation revealed that [Employee A], while in an official capacity as the COTR [Contract Office’s Technical Representative] for an SEC contract with [Company X], developed a personal friendship with the president and owner of [Company X] and acted in an impartial and improper manner in violation of numerous provisions of the Standards of Ethical Conduct in connection with her oversight of that contract… 

Specifically, we were informed that, according to a document found on the Internet, [Employee A]…had attended a pre-proposal conference conducted by the Maryland Office of Attorney General (OAG) on June 29, 2006, along with [Company X Owner] on behalf of [Company X], using her married name….

In the late spring or early summer of 2003…[Employee A] solicited and accepted a favor from [Company X Owner] in the form of employment for her son….

 [Company X Owner] further testified that on one occasion, she gave [Employee A] a piece of costume jewelry after [Employee A] complimented her on the “cute” necklace she was wearing. 

2. SEC official intimidates her mother’s broker

From Misuse of Official Government Position (OIG-480), August 12, 2008:

The OIG investigation uncovered evidence that [Employee A], while she served as Deputy Secretary of the Commission, repeatedly called a Morgan Stanley branch office concerning her mother's account. During those calls, she clearly and purposely identified herself as a Commission employee, including specifying that she was the Deputy Secretary of the SEC, in an attempt to intimidate her mother’s broker and other Morgan Stanley staff…

 [Witness 2] stated that [Employee A] was very angry at the broker and was trying to obtain a tax document….[Witness 2] related that she overheard [Employee A] yelling “You’re going to have to miss happy hour tonight and get this document.” [Witness 2] further stated that during this same phone call, she heard [Employee A] say to the broker, “I’m the Assistant Secretary at the SEC.”…

 [Witness 2] also recalled an occasion when [Employee A] told her that she called her mother’s bank, and bragged that she told the bank representative that “he should have Googled her name before he spoke with her.”

3. Inappropriate communications with former SEC attorneys representing clients overseen by the agency

From Failure to Vigorously Enforce Action Against W. Holding and Bear Stearns at the Miami Regional Office (OIG-483), September 30, 2008: 

MIRO [the SEC’s Miami Regional Office] was also making progress obtaining a settlement arrangement with the final proposed defendant, [ ], when MIRO Regional Director [ ] abruptly decided to close the case entirely…

 [ ] then contacted counsel for Bear Stearns, who was a former SEC Enforcement lawyer, and with whom [ ] had an ongoing personal relationship, and said “Christmas is coming early this year” and Bear Steams “can keep their money.” [ ]’s lawyer, [ ], also a former SEC lawyer who had worked with [ ] and [ ] in Enforcement in the mid-to-late 1980s, was also informed that no case would be brought against his client. The decision also meant that W. Holding and [ ] were not required to pay a penalty or agree to any charges….

MIRO staff was stunned at the decision to close the case, and the reasons provided to them were incongruous.

4. Insider trading by SEC employees

From Employee's Securities Transactions Raise Suspicions of Insider Trading and Create Appearances of Impropriety; Violations of Financial Reporting Requirements; and Lack of SEC Employee Securities Transactions Compliance System (OIG-481), March 3, 2009:

The OIG investigation disclosed that approximately two months before an investigation of a large health care company was opened in her Assistant group, Employee A sold all of her shares of stock in the company. We also found that Employee A purchased additional shares of a global oil company’s stock both a few days and a couple of weeks after a formal investigation was opened by her friend who occupies the office next to her. Employee A also sold shares of that company’s stock two days before an inquiry was opened in that matter….

The OIG investigation disclosed that Employee B 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 Employee A had recommended those stocks as well. Both Employee A and Employee B inexplicably testified that they failed to see how Employee B sending e-mails to his brother and sister-in-law from his SEC account could raise an appearance that he may be sharing nonpublic information with someone outside of the SEC….

The investigation further revealed that although the SEC, through its law enforcement function, is charged with prosecuting cases of violations of securities laws, including insider trading on the part of individuals and companies in the private sector, the Commission has essentially no compliance system in place to ensure that Commission employees, with the tremendous amount of non-public information they have at their disposal, do not engage in insider trading themselves.

5. Enforcement attorneys share non-public information with FBI agent engaging in fraudulent short-selling

From Unauthorized Disclosure of Non-Public Information (OIG-512), January 12, 2010:

The Office of the Inspector General (“OIG”) initiated this investigation following disclosure in a criminal trial that [ ] and [ ], two attorneys in the Enforcement Division…had communications with [ ], a former Federal Bureau of Investigation (“FBI”) Special Agent about ongoing SEC Enforcement investigations.

The OIG’s investigation revealed that both [ ] and [ ] disclosed nonpublic information to [ ] without an applicable access request. This information was utilized by [ ] and [ ] in their fraudulent scheme to engage in short selling, for which they were later indicted and convicted.

Michael Smallberg is a POGO Investigator.

Comments

[sunshine]

Why do some include exhibits and others not? Are certain exhibits being withheld for some reason? Seems odd.

[Michael Smallberg]

Hi Sunshine,

Thanks for your question.

FYI, we've posted everything we received through FOIA and from other sources. Unfortunately, most of the reports we received did not include the exhibits, with a few exceptions:

http://pogoarchives.org/m/fo/sec-oig-report-20090915.pdf

http://pogoarchives.org/m/fo/sec-oig-report-20090925.pdf

http://pogoarchives.org/m/fo/sec-oig-report-20081126.pdf

http://pogoarchives.org/m/fo/sec-oig-report-20090330.pdf

http://pogoarchives.org/m/fo/sec-oig-report-20090709.pdf

If we get our hands on any other exhibits, we'll be sure to update our resource page.

Thanks,
Michael

[sunshine]

where are the exhibits (transcripts) to the reports? Coming?