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Insider Trading: A New Twist

When someone mentions “insider trading”, Colorado residents may think of Joe Nacchio and Jeff Skilling. These gentlemen are examples of highly paid and high powered corporate executives who don’t need to guess at how the shares of their company will be valued. They do not need to guess whether the value of shares will go up or down. They know things the rest of us do not know. For example, they know whether their companies can expect substantial losses in the next quarter. If the forecast is gloomy, they sell their stock now (high) rather than wait (low). They trade stock on the basis of information known to the company insiders.
Last week, though, CBS News reported the story of stock regulators who used confidential and secret information gleaned from their regulation duties to profit and advise family and friends to profit from insider information. Kind of like putting Dracula in charge of the blood bank.
According to CBS, two SEC attorneys are under active criminal investigation by the FBI for trading stocks based upon insider information. The accusations against these attorneys are contained in a report by the SEC Inspector General. It is based upon a review and analysis of e-mail and brokerage records. Ironically, the SEC’s Inspector General uncovered a possible fraud with its own employees but failed to detect the $60 billion dollar Bernie Madoff Ponzi scheme.
One attorney under investigation works in the office of the SEC’s chief counsel and has access to a substantial amount of non-public information. In other words, information known only to the regulators and not the general public. Of course, the dupes in all of this are the average investors.
The other attorney under investigation works in the SEC enforcement division. Each of these attorneys traded in the stock of a large financial services company despite being told by another SEC employee of ongoing investigations of that company.
These two attorneys acted like they were entitled to use this non-public information at the expense of the taxpayers who were paying them. One attorney sent e-mails from his SEC account to his brother and sister-in-law recommending particular stocks. His stock portfolio at one point was valued at $200,000.
As to the other attorney, two months before an investigation of a large health care company, she sold all her stock in the company. Shrewd financial decision or thievery? Also, two days before an inquiry was opened by a colleague in the office next to hers, she sold stock in the oil company subject of the inquiry. Shrewd investment strategy or pure thievery?
The female attorney traded stocks 247 times between January 2006 and January 2008. Her stock portfolio at one time was valued more than $170,000.
One of the sources of information was another SEC employee who told investigators that these two attorneys told her to buy stock in a company, despite their knowledge of multiple ongoing investigations of that company. That was a blatant violation of SEC rules.
Guess what? Both attorneys are still employed at the SEC earning healthy six figure salaries. Of course they deny wrongdoing and may suggest that they were just smart investors. Some court will ultimately determine whether they are smart investors or smart thieves.
Small comfort that the SEC has now hired a compliance officer and has strengthened rules governing the reporting of trades by SEC employees. How can we trust the regulators to uncover criminal frauds like Bernie Madoff when the regulators are busy feathering their own nests with profits from their criminal activities?