Sunday, March 2, 2014

SEC: Corruption Central?

SEC Enforcement doesn't include self-regulation               [Economic Times]


Click here for related article [Jia Lynn Yang Washington Post]

After we learned a while back that a former Wall Street executive -- now employed by the SEC Enforcement Division -- had been caught tipping off his pals at his old financial firm about SEC investigations into their activities [punishment was a slap on the wrist rather than prosecution] we figured it couldn't get much worse there. 

But, we forgot.  This is the obama Administration, in which corruption is the watchword; if you're not corrupt and milking the federal government for all it's worth, you're not playing the game right.  It turns out the SEC hasn't been this corrupt since the Clinton Administration.

For background:

The SEC was formed in 1934, following the 1929 Stock Market collapse,  to monitor and regulate the Market -- Stock, Mercantile, Commodities, etc., to make sure there is no sleight of hand of, God forbid, INSIDER TRADING

For the uninitiated, insider trading is buying and selling by exploiting classified or restricted information which is not available to the public; e.g., if you read a confidential filing that IBM has a record profit for this quarter, and you buy stock figuring it will take off.  The Enforcement Division of the SEC investigates and prosecutes investors and financial gurus for Insider Trading.  For example, SAC Capital Portfolio Advisor, Mathew Martoma, face a substantial fine and several years in prison if he is convicted of "insider trading".

Old Joe; it takes a crook to catch one
Oddly, President Roosevelt appointed old Joe Kennedy [JFK's dad] as the first Chairman, not because he was above reproach, but rather, because he was the most corrupt and ruthless SOB on Wall Street, and FDR figured it took a ruthlessly corrupt guy like Kennedy to understand the ins and outs and to know where and how the corruption functioned.  To his credit, he cleaned up Wall Street, mostly by outing and prosecuting his old adversaries -- but, in the end, it all worked out.


According to a report published by UVA, The Stock Picking Skills of SEC Employees, investigated the trading activities of SEC employees and noted that they systematically beat the market by trading immediately before costly enforcement actions, based on "... privileged, non-public information."

"In short, it appears that SEC employees continue to take advantage of non-public information to trade profitable in stocks under their regulatory purview."


Now, to allay your concerns that SEC regulators are exploiting their insider information to make small fortunes for themselves, the SEC spokesman, John Nester advised
"Each of the transactions was individually reviewed by the Ethics Office, and most of the sales were required by SEC policy.  Staff had no choice.  They were required to sell."  Theoretically, these new rules apply to regulators assigned to investigate a company -- thus, they must sell -- maybe.

The researchers obtained their information under FOIA requests, but still had to work around limits on the information provided.  Examples of the SEC regulator trades included ahead of enforcement actions against
DJ Plunge [04/2010]


a) Bank of America      [04 Feb 2010]

b) General Electric       [27 July 2010]

c) Citigroup                  [29 July 2010]

d) Johnson & Johnson  [08 April 2010]

e) JP Morgan                [07 July 2010]




In these cases, SEC regulators sold their shares in these companies shortly before news of enforcement actions was released to the public.


So, under the current SEC leadership's interpretation of the regulation, it is not only acceptable to trade on classified insider information, it is expected that they do so. 

Kind of like expecting a beat cop to hold up the local grocery store; after all, he has a gun, and people with guns are expected to do criminal things -- right?