SEC ices staff probes

Group: SEC ices staff probes
By: Eamon Javers
December 17, 2009 12:44 PM EST


New documents released by the Securities and Exchange Commission show that the agency tasked with regulating the nation’s financial markets has not taken any action on a host of allegations of internal wrongdoing. The allegations range from SEC employees suspected of insider trading to assisting in a Ponzi scheme and even, in one case, possession of a dangerous weapon inside a federal facility.

The documents were turned over to the nonprofit group Project on Government Oversight in response to a Freedom of Information Act request for a detailed list of the investigations launched by the commission’s inspector general, who is tasked with rooting out internal problems, and the commission’s response in each case.

The data turned over by the SEC show that the commission has taken “no action” on 27 of the 52 recommendations made by its inspector general since 2007. And they show that the inspector general’s investigations uncovered a wide range of improper activity within the commission, including:

• “Conflict of interest; improper solicitation and receipt of gifts from a prohibited source and other misconduct”

• “Suspicions of insider trading and appearances of impropriety in securities transactions; violations of financial reporting requirements”

• “Disclosure of non-public information”

• “Misuse of government computer resources to assist Ponzi scheme and violations of standards of ethical conduct”

The SEC has taken no action on any of those findings, the documents show. What’s more, the inspector general’s Bernard Madoff-related finding that the SEC had failed to uncover a Ponzi scheme has also met with “no action” by the SEC.

A second document released by the commission lists 312 recommendations made in the inspector general’s audits since December 2007 — the status of 197 of these recommendations is still listed as “Pending.”

SEC spokesman John Nester said the commission reviews each recommendation issued by the inspector general. “We take seriously the recommendations of the Inspector General,” he said. “We have put in place a process to review every outstanding recommendation regarding internal policies and procedures and have been making progress in addressing them. Additionally, with respect to personnel actions, we carefully consider the recommendations and do not hesitate to take action as appropriate based on the facts, and in accordance with due process.”

The SEC has struggled to reinvent itself since the Madoff story broke in late 2008, revealing that the commission had multiple chances to catch the multibillion-dollar fraud, and missed each one.

In September, Mary Schapiro, who was appointed to run the commission by President Barack Obama in January, said of the Madoff fraud, “It is a failure that we continue to regret and one that has led us to reform in many ways how we regulate markets and protect investors.” And she said that the SEC has implemented a host of reforms in the year since the scandal, including streamlining enforcement procedures and putting more experienced staffers on the frontlines.

Despite all that, the inspector general’s recommendations in a slew of cases appear not to have been followed. The inspector general, David Kotz, recommended specific actions be in each case of the violations he uncovered. In the conflict of interest and gift case, for example, Kotz recommended “Disciplinary action, up to and including dismissal,” as he also did in the case involving disclosure of non-public information.

On the suspicions of insider trading, Kotz suggested “Disciplinary action.” And in the case of an SEC employee who allegedly assisted a Ponzi scheme — which apparently was not Madoff-related — Kotz suggested that the SEC claw back $25,000 in benefits the employee had received from the SEC by taking an early retirement when her role in the alleged scam was discovered. Yet the commission took no action.

The audit recommendations include suggestions for new policies, procedures and training techniques. Some of them are aimed at helping the SEC avoid another Madoff-like failure. For example, the inspector general recommended that the SEC should “put in place procedures to ensure that investigations are assigned to teams where at least one individual on the team has specific and sufficient knowledge of the subject matter (e.g., Ponzi schemes).”

“It is simply unacceptable for a federal agency to ignore so many of the findings and recommendations made by its [inspector general],” wrote Danielle Brian, the executive director of the Project on Government Oversight, in a letter to Schapiro on Dec. 16. “Based on the SEC's poor track record as revealed in these documents, the public has every reason to question the agency's commitment to implementing the sorely needed post-Madoff reforms.”