By MICHAEL SMALLBERG
The Washington Post?is reporting?that the Securities and Exchange Commission (SEC) Office of Inspector General (OIG) uncovered a series of inappropriate communications between an SEC attorney and a hedge fund manager whose firm was under investigation for insider trading and market manipulation.
The full version of the OIG?s investigative report on the matter, issued to the agency on August 8, 2011, has not been posted online (we just submitted a Freedom of Information Act request seeking the full version). But the OIG provided a detailed summary of the investigation in its semiannual update to Congress?(released today):
On December 15, 2010, the OIG opened an investigation into allegations received from an SEC regional office that an SEC headquarters supervisory attorney had been communicating inappropriately with an outside party, who was a hedge fund manager. Specifically, it was alleged that the SEC attorney inappropriately discussed with the hedge fund manager the legality of certain actions previously taken by the hedge fund manager, as well as certain actions he proposed to take. It was further alleged that these inappropriate communications dated as far back as 2006, and, according to the regional office that was investigating the hedge fund manager?s activities, made it impossible for Enforcement to litigate a case against him because of his ability to raise these communications as a potential defense....
The OIG investigation found that in June 2010, the SEC regional office opened an official investigation into alleged insider trading and possible market manipulation by the hedge fund manager based on a referral from that regional office?s Examination staff. According to the regional office Examination staff, the hedge fund manager may have been involved in insider trading and market manipulation stemming from a 2006 purchase of securities of a natural resource company and a subsequent offer to purchase all of the company?s outstanding shares at a substantial premium over the preceding day?s closing price.
The regional office was especially concerned about two specific communications in?April 2006:?(1) a telephone conversation during which the SEC attorney allegedly told the hedge fund manager that his purchase of securities prior to announcing a proposed takeover of the company was legal; and (2)?an e-mail in which the SEC attorney provided his cell phone number and informed the hedge fund manager that he might ?feel freer? to fully express his opinions on a non-SEC line. [Emphasis added]
The OIG concluded that these communications had several harmful effects:
The OIG investigation found that the SEC attorney?s communications with the hedge fund manager during 2006 showed a lack of judgment on his part. We determined that these communications, which occurred during a time period when Enforcement was considering recommending possible charges against the fund manager to the Commission, were inappropriate and inconsistent with the duties and responsibilities of a supervisory SEC attorney. The OIG also found that the SEC attorney had communications with the hedge fund manager that predated the 2006 occurrences by several years, indicating a close relationship between the SEC manager and hedge fund manager. Moreover, the OIG found that the SEC attorney?s continuing communications with the hedge fund manager, in addition to being inappropriate:??(1) prompted Enforcement to ask the SEC attorney?s former supervisor to ensure he was not involved in Enforcement?s 2006 investigation; (2) caused the hedge fund manager to believe that his 2006 purchase of securities from the natural resource company was legitimate; (3) led to a finding that the hedge fund manager lacked the requisite scienter for liability; and (4) created significant litigation risk for the regional office in 2010.
Additionally, the OIG found that the SEC attorney inappropriately offered his cell phone number to the hedge fund manager so that an outside lawyer could call the SEC attorney to discuss whether the hedge fund manager had done anything wrong.?The OIG investigation showed that the SEC attorney informed the hedge fund manager that he would be more willing to express his opinions on a non-SEC telephone line. The OIG found that this statement was inappropriate, created a cloud of suspicion as to the SEC?s attorney?s intentions, and was inconsistent with the requirement that federal employees conduct themselves in a manner that ensures complete confidence in the integrity of the federal government. [Emphasis added]
The OIG recommended that disciplinary action up to and including dismissal be taken against the SEC attorney.
In its semiannual report, the OIG also described its pending investigations of: a former senior Enforcement official who allegedly played an improper role in the decision not to recommend enforcement action against a firm shortly before leaving the SEC to join the firm; a regional office that allegedly failed to investigate a prominent law firm?s role in computer tampering; various allegations concerning the court-appointed receiver in the Stanford Ponzi Scheme; and allegations of procurement violations.
Michael Smallberg is a POGO Investigator.
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