Posted in: SEC |
As mentioned on Securities Law Prof Blog, the SEC’s Office of Inspector General released its semi-annual report to Congress. In it they include a report of its own procedures and investigations.
For the average reader, the most interesting part of the 158-page document is likely to be the section regarding the SEC’s investigations into its own employees. The agency has 16 offices and thousands of employees, so some are bound to step out of line.
Normally I would not share news regarding the inner-workings of the SEC, especially since brokers for smaller, individual investors are likely to be governed - in a sense - by FINRA. But this is an opportunity to see how the SEC polices themselves. Here are some of the highlights, from the full document that can be downloaded here:
Assistance with the Operation of a Ponzi Scheme by Former SEC Employee Using SEC Resources
On November 4, 2008, the OIG opened an investigation as a result of information received from the Securities Division of the Arizona Corporation Commission (ACC). The ACC advised the OIG that a Supervisor in the SEC’s Office of Administrative Services had been allegedly assisting with the operation of a Ponzi scheme orchestrated by an Arizona man. According to an ACC investigator, one of the investors who had cooperated with the ACC’s investigation of this Ponzi scheme perpetrator provided the ACC with e-mails the the Supervisor sent from her SEC computer regarding sending funds on his behalf.
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The OIG obtained and reviewed the Supervisor’s SEC e-mails for the relevant period. The OIG reviewed those e-mails to determine the nature of the Supervisor’s involvement with the Ponzi scheme perpetrator and his companies. The OIG provided the ACC with the Supervisor’s approximately 2,300 e-mails that were related to the Ponzi scheme perpetrator and his companies.
According to the ACC Order, the Ponzi scheme perpetrator presented himself as “an international numerologist and spiritual financial adviser who could predict the future utilizing numerology.” He purportedly provided services as “a life coach” to individuals who paid to join his “VIP coaching program” and told the members of this program that “they could, through the use of numerology concepts, improve their financial well-being by investing in futures and commodities and/or enhance their spiritual awareness.” Eventually, he began soliciting members of his lifecoaching program for funds that he claimed would be invested on their behalf in copper futures using numerology principles to time the futures market. In fact, none of the investors’ funds were ever invested, but instead were deposited in the checking accounts of his companies and used for his own personal benefit. His scheme raised approximately $430,000 from 65 investors.
The OIG discovered that during the period in question, the Supervisor used her SEC e-mail account to conduct business on behalf of the Ponzi scheme perpetrator and his companies on virtually a daily basis. The OIG found that the Supervisor was extensively involved in handling the payments to and from his victims, and used her SEC e-mail account to communicate directly with those victims.
In this incident, a supervisor at the SEC was foolish enough act as a bookkeeper for a Ponzi schemer-while using her e-mail address at the agency. Perhaps even more ludicrous is the schemer’s claim that numerology to improve financial well-being.
Misuse of Government Computer Resources
On December 1, 2008, the OIG opened an investigation as a result of information received from the Office of Information Technology Security group. This information showed that a Supervisor in an SEC Regional Office had used his SEC-assigned computer to access Internet pornography.
The OIG reviewed certain computer records, including an Internet history log, related to the Supervisor and the results of a forensic analysis of his SEC computer hard drive. The OIG also reviewed the Supervisor’s Official Personnel Folder and time and attendance records. Finally, the OIG took the Supervisor’s sworn, on-the-record testimony. The OIG investigation revealed that while using his SEC computer during seven working days, the Supervisor received approximately 196 access denials for Internet websites classified by the Commission’s Internet filter as “Pornography.” The Supervisor’s SEC computer hard drive also contained numerous pornographic images. The Supervisor admitted under oath that he accessed pornographic and sexually explicit websites from his SEC computer during work hours. He also admitted that he had frequently viewed pornography at work on his SEC computer for about a year.
The OIG found that the Supervisor violated Commission rules and policies on the use of SEC office equipment as well as the Government-wide Standards of Ethical Conduct. The OIG also found that two video files discovered on the Supervisor’s computer hard drive potentially contained child pornography. Therefore, the OIG referred the matter to the FBI.
This one is just amusing. A supervisor is tries to use his agency computer to access pornography, and is denied access 196 times. He keeps at it until he draws the attention of security, and is subsequently turned into the FBI.
Allegations of Unauthorized Disclosure by Former Employee and Improper Enforcement Investigation
The OIG has completed its investigative work in this matter and has begun writing a report of investigation into allegations made in a published book, including an allegation that a former SEC attorney may have taken confidential investigative materials when he left the SEC and provided those materials to a company for which he went to work as a lobbyist.
It was also alleged in the book that the SEC settlement with the company was inadequate given the evidence of the company’s fraud the author had provided to the SEC.
In this investigation, we took the testimony and conducted interviews of a dozen former and current SEC employees, including the testimony of both examiners who conducted the relevant examination of the company at issue. We took the testimony of the staff attorneys responsible for related investigations, conducted telephone interviews with the former Enforcement attorney who is alleged to have engaged in wrongdoing, and took testimony of Senior Officers with responsibilities related to the examination and investigation of the company at issue. In addition, we took the testimony of the book’s author and his counsel about allegations related to the SEC’s action against the company outlined throughout the book, and obtained and reviewed the several detailed complaints the author had submitted to the SEC. We also obtained and reviewed the relevant examination workpapers, voluminous e-mails of former and current employees, and various Enforcement documents concerning related investigations.
The OIG plans to issue its report of investigation prior to the end of the next semiannual reporting period.
This is still a pending investigation, but the allegations are serious. A former employee of the SEC leaves the agency, and then hands over confidential information regarding investigative practices to his next employer. If true, this could mean he is helping his firm sidestep inquiries from the SEC, or even avoid detection.
