SEC Attorneys Accused Of Insider Trading Like Legally Dumb And Dumber

When first we heard that two enforcement attorneys at the SEC were being probed by the FBI for insider trading, we almost sympathized. After all, as the GAO informed us last week in its damning report on the dysfunctional agency, commissioners seem to have spent the Bush years thinking up new ways of preventing enforcement attorneys from doing their actual jobs. And in an environment of incessant deregulation, the markets have to regulate themselves, right?

Uh, then we read the 51-page SEC Inspector General report on the case submitted to SEC chairman Mary Schapiro March 3 by SEC IG David Kotz, who made no attempt to conceal his amazement at their awe-inspiring stupidity. Seriously, Hank Paulson’s chief of staff who didn’t know who the nine big banks were is a MacArthur fellow next to this pair, who are only identified in the report as [#1] and [#2].

The OIG investigation disclosed that [#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. Both [#2] and [#1] inexplicably testified that they failed to see how [#1]’s 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.

More amazing highlights after the jump.Attorneys #1 and #2, a male and female respectively, were a tight pair who talked politics and stocks openly at a standing Monday lunch with another SEC attorney the IG interviewed, as well as at Thursday bagel sessions with their teams. It’s tough reading the report not to fall a little bit in love with the character of Attorney #2, whose story reads like Legally Blonde gets a crush on Jim Cramer. According to the report, Attorney #2:

  • Spends “much of her work day e-mailing and searching the Internet about stocks and called the markets her “main hobby and passion” and testified that she “usually watches financial news programs before and after work,” and sometimes follows the hot stocks on her laptop. And here we thought SEC attorneys spent their days fixing the copy machines and drafting internal memos.
  • Made 247 trades between 2006 and 2008, many of those from the convenience of her SEC computer!
  • Thinks of herself as an ethical person, who says of the risk of insider trading:

    It’s always in the back of my mind. I’m very conscious of my ethical obligtions to the Comission and as soon as I make — I do a transaction, it’s in the back of my mind to be sure it gets reported on a timely basis.

  • But nevertheless sometimes bristles at all the agency ethics rules, as she wrote in an email to her pal Attorney #1 of a stock the report calls “H”

    But this still kills me. H was one of my best ideas in years and I knew it at the time — but couldn’t buy more because of a damn case. (As I may have whined to you before.) I would have bought at least $10K worth back then. Basically 2000 shares instead of 200.

  • Wait, the lady wanted to buy stock in a financial services company, but an SEC investigation into misconduct at the company prevented her from doing so? And that totally kills her? Yup! And according to their standing Monday lunch partner, the two were big buyers of stock in a financial services firm the report calls R — and the lunch partner bought some, too. She was planning on buying more, but then she learned more and felt conflicted:

    [Lunch partner] said she learned in Fall 2005, then Spring 2006, and then June 2007 of the three separate investigations into R [after which she concluded] that she “had planned to buy a lot of R stock” but “that just did it.”

    But that didn’t do it for our passionate day-trading duo!

    [#2] and [#1] would tell her to buy more R stock, and she told them she could not purchase more because of the investigations of R she had learned about. She testified she believed neither [#2] nor [#1] owned stock in R. She was incorrect. Both [#2] and [#1] traded in R…even though their fellow enforcement attorney…became aware of three separate enforcement investigations of that company. [Lunch partner] credibly testified that she told #2 an #1 during their regularly weekly lunches that she could not purchase additional stock in this company, although incredibly they both deny remembering #3 telling them about any of these investigations.

    So, how does that strategy of buying stock in big financial services firms despite having inside information on the details of three separate SEC investigations into said firm work out, long term?

  • Here’s Jane again:

    [#2] testified that at the time of her testimony in October 2008 she owned more than 50 stocks after a recent sell-off of stocks. She testified that her stock portfolio was then valued at about $45,000, but that it had been valued at about $170,000 at one point.

    Goodness, could this be the rare case in which crime didn’t pay?

  • Here is what Attorney #1 had to say about the possibility that his trading activity might appear a little suspect, if by chance he traded after learning inside information he subsequently, like, forgot he knew:

    I have potentially created a problem for myself, because someone may wonder whether I remembered and what I remembered, but I have not, in that situation, traded on any kind of material nonpublic information. My heart is pure.

In the end, we guess the only takeaway here is that when a federal agency is staffed by idiots, deprived of basic office supplies and otherwise rendered completely useless by the deliberate sabotage of the administration running it, its “insider information” loses some of its value too.

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