If A Regulated Business Acted Like The Regulators, They Would Be In Jail. Yet The Regulators Waltz Away Without Even a Slap On The Hand!

SEC failed to guard sensitive information

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Anne Wernikoff

By Kevin Cirilli - 08/11/14 06:00 AM EDT

An internal government report obtained by The Hill says the Securities and Exchange Commission has failed to properly guard sensitive nonpublic information. [READ INSPECTOR GENERAL REPORT.]

The report from the SEC’s Inspector General says the agency failed to clear the room during non-public executive session votes of the five-member board.

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It also found that officials didn’t keep complete attendance records during at least one high-profile meeting involving a J.P. Morgan settlement worth $200 million.

The 16-page Office of the Inspector General (OIG) report didn’t blame an individual for leaking information, but it raised questions about how the agency conducts routine business.

The findings are damaging, SEC experts told The Hill, because it exposes nonpublic market-sensitive information to lawyers, staffers and the general counsel of SEC commissioners who aren’t authorized to see it.

Experts also say the information could be used improperly by people with inappropriate access to make stock trades. 

SEC Chairwoman Mary Jo White declined to comment through a spokesman when asked if she’s made changes to SEC policy as a result of the report. SEC spokesman John Nester also declined to comment.

“This is an agency’s worst nightmare — it’s startling that the SEC would not be as careful with confidential information as it should be,” said Peter J. Henning, a former senior SEC attorney who now teaches law at Wayne State University.

“If you have the agency responsible for policing the market on how information is used — you’d expect them to meet the same standard,” Henning added.

One senior Washington lobbyist said the report showed “a complete lack of thoroughness” on behalf of the SEC board.

“Given that the SEC’s mantra is to prevent leaking insider information, it’s ironic that their meetings are so loosey-goosey,” said the lobbyist, who frequently handles cases with the SEC and as a result asked not to be named.

The report centers on a Sept. 12, 2013, SEC nonpublic vote approving the J.P. Morgan settlement in response to the “London Whale” trading scandal. During the scandal, the bank lost $6.2 billion off a risky trade led by trader Bruno Iksil, whose nickname was “London Whale.”

The SEC found that J.P. Morgan lacked policies to prevent its traders from fraudulently overvaluing investments to conceal hundreds of millions of dollars in trading losses.

To avoid further litigation, J.P. Morgan agreed to a settlement, which the commission approved in a 2-1 vote at the 16-minute meeting.

Reuters reported on the nonpublic vote two days before it was made public. SEC Commissioner Michael Piwowar — the dissenting vote in the "London Whale" decision — raised concerns about the leak that helped trigger the OIG report.

“The OIG’s investigation revealed that the Closed Commission Meeting room was not cleared before the voting,” according to the report.

“Although [staff] are supposed to clear the room after each Executive Session matter and ensure attendance for each matter is limited to those on the approved roster, at times the Commissioners may begin announcing and/or deliberating the next matter before the room has been cleared from the previous matter,” the report said.

Even when the room is cleared, the report found that it’s still possible to hear the information by listening in the hallway.

“[Staff] informed the OIG that it is possible for people standing outside the Closed Commission Meeting room to hear the discussions and votes through the closed doors,” according to the report.

Officials were unable to obtain the complete attendance roster for the Sept. 12 meeting.

OIG officials searched emails and phone records for 39 SEC employees and interviewed 53 SEC employees, including White and the commissioners.

The SEC’s five commissioners are the top regulatory body for policing Wall Street and securities firms. They cast deciding votes in whether to penalize or settle with a financial institution, voting on a handful of cases at each meeting.

Months before the "London Whale" vote, White pushed internally for a policy that gave her office discretion about who was in the room during Executive Session meetings.

During the "London Whale" vote, White and Commissioner Daniel M. Gallagher recused themselves because of potential conflicts of interests from their previous jobs in the private sector, as was widely reported.

That left Commissioner Luis A. Aguilar as acting chairman for the nonpublic vote. The report found that Aguilar received conflicting staff opinions about who should clear the room.

The report also found that Aguilar sent nonpublic information to his personal email account after the vote, contrary to SEC rules. Aguilar told investigators “he could not print documents at home when connecting to the SEC network … and, as a result, forwarded emails to his personal email account when he needed to print certain documents.”

In a statement to The Hill, Aguilar said he’s stopped sending SEC documents to his personal email.

“I actually didn’t view it as sending the document to someone else,” he said. “For reasons unknown to me, even though my email and printer issues had nothing to do with the disclosure of nonpublic information that was investigated by the OIG, the OIG decided to mention it in its report.”

He added: “I fully support the OIG’s investigation into the unauthorized disclosure of nonpublic information to a news reporter.” 

He referred additional comment to White.

Read more: http://thehill.com/policy/finance/214740-sec-failed-to-guard-sensitive-information#ixzz3A8H67js0
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