Wall Street's main regulator, the Securities and Exchange Commission (SEC), which is fighting for survival after failing to spot the bubble in the credit markets or Bernard Madoff's record-breaking fraud, now faces an insider trading scandal to add to its woes. Two senior employees are under investigation by the FBI for allegedly using insider information to trade stocks, according to a leaked internal SEC report.
The SEC's in-house ethics monitor, inspector general David Kotz, wrote that one of the unnamed attorneys under investigation works in the Office of the SEC's chief counsel and has access to a tremendous amount of non-public information. One lawyer made 247 trades in the two years ending January 2008, and the other made 14.
A furious politician who was handed the 3 March report made it public yesterday. Chuck Grassley, an Iowa senator, also fired off a letter to the new SEC chairman, Mary Schapiro, saying "it's hard to imagine a more serious violation of the public trust than for the agency responsible for protecting investors to allow its employees to profit from non-public information about its enforcement activities".
The 51-page report was redacted to remove names of the two employees and the stocks in which they traded. However, it showed that one sold all her shares in a healthcare firm two months before the agency began investigating the company, and also sold stock in a giant oil company two days before the SEC opened an inquiry.
The two individuals deny any wrongdoing and are still working at the agency, and the SEC pointed out yesterday that Mr Kotz's report does not allege that any insider-trading offences actually took place. Rather, it faults the SEC's procedures for monitoring employees' investments and conflicts of interests and its reliance on an "honour system" for reporting trades.
Ms Schapiro has made it a priority to significantly improve the agency's ethics and compliance programmes, a spokesman said, and the SEC takes seriously any allegations of misconduct. Mr Grassley is demanding that the SEC sets out what new procedures it plans to implement by 28 May, and wants assurances that insider trading is not "systemic" within the organisation.
The SEC is already under fire on Capitol Hill for perceived repeated failings over the past decade. It emerged that agents investigated whether Bernard Madoff was running a pyramid scheme, but did not find any evidence of the country's biggest ever fraud. It has also faced criticism for failing to spot the dangers of the growth of the credit derivatives market. A regulatory overhaul proposed by the Obama administration is expected to hand much greater powers to the Federal Reserve, and the SEC's future role remains uncertain.