When she was not cracking down on white-collar miscreants for securities violations, enforcement attorney No. 2 at the Securities and Exchange Commission just loved trading stocks.
Two or three times a day, she took breaks from her work to click up Yahoo Finance or surf the latest rants on those wacky investor message boards.
“I do spend a lot of time, you know,” she said. “It’s my main hobby. It’s my passion. I feel very proud of my knowledge. It’s my way of keeping intellectually above what other people are doing.”
For now, she is known only as No. 2. This does not indicate her rank within the agency. It’s her handle as a government regulator under criminal investigation. She is suspected of trading stocks using insider information gained at the SEC.
Last week, CBS News acquired a copy of a report from the Office of the Inspector General that concluded No. 2 violated the SEC’s internal policies. The agency then turned the case over to the U.S. Attorney’s Office and the Federal Bureau of Investigation.
No. 2 made 247 stock trades between January 2006 and January 2008, according to the report.
She had lunch almost every Monday with enforcement attorney No. 1, who is also under criminal investigation, to discuss stock ideas.
They often met at a restaurant near the SEC’s Washington, D.C., headquarters, talking about stocks, the market, and their work as regulators. There was even a No. 3 that sometimes came with them, but is not under criminal investigation now.
They used SEC computers to research stock picks and communicate personal investment ideas. No. 1 even emailed stock tips to his brother and sister-in-law using his SEC email account.
The Inspector General’s Office, which has been investigating two years of suspicious stock trades of several SEC staffers, concluded the SEC has “essentially no compliance system.” The SEC has said that it is taking the allegations seriously.
Nos. 1 and 2 have denied wrongdoing.
The two lawyers both made a salary of more than $167,000 a year busting people on Wall Street. She has a personal stock portfolio that at one point was worth $170,000. He has a portfolio that at one point topped $200,000.
For an SEC attorney who has likely heard the world’s most implausible defenses, No. 1 was surprisingly lame when confronted. Somehow he lost records of some of his securities transactions and compliance efforts.
“Had a file where I stuffed all that stuff,” he told investigators. “I am not sure where that file is.”
He insisted he would never trade on the nonpublic information he gained at the SEC. Investigators then asked if he might have done so, you know, inadvertently.
“How could I do that inadvertently?” he responded. “If I don’t know about the fact, I’m not trading based on that fact.”
But what if he knew the fact, then forgot the fact, and then traded?
“I have potentially created a problem for myself,” No 1 conceded, “because someone may wonder whether I remembered and what I remembered, but I have not in that situation, traded on any kind of material nonpublic information. My heart is pure.”
I’ll leave it prosecutors to decide if Nos. 1 and 2 broke laws. And I’ll leave it to those the SEC has pursued for illegal insider trading to complain about the outrageousness, egregiousness and hypocrisy of regulators, like even that prostitute-frequenting Eliot Spitzer guy, who operate above the law.
My only question is where did Nos. 1 and 2 find the time to trade stocks?
On April 27, SEC Chairman Mary Schapiro was the keynote speaker at the Society of American Business Editors and Writers’ annual conference in Denver, where she graciously endured questions targeting her agency’s competence.
Remember when those tipsters called the SEC to complain about Ponzi schemer Bernie Madoff, and the SEC couldn’t be bothered? That’s not Schapiro’s fault, since she’s only been on the job for a few months, but man was she apologetic.
“Last year, we had 750,000 tips,” she explained, “and we’ll never be able to follow up on all of them.”
Particularly when No. 1 and No. 2 are yacking about their stock trades all day.
In another breath, Schapiro promised change.
“Investors need to see that we are going after those who engage in wrongdoing,” she declared. “They need to see that we’re rooting out fraud.”
Not one of the more than 200 financial journalists in the room would have known to ask whether she was talking about insider stock trades within her own agency. But she should have known about No. 1 and No. 2 by then, since the Inspector General’s report was dated March 3.
“If we cannot show investors that we are looking out for their interests as much as the interests of the financial institutions, then we will have little success in restoring confidence,” she said. “Enforcement has got to be real.”
Nothing like keepin’ it real, Mary Schapiro. Take that crack staff of yours and get ’em.
Al Lewis: 201-938-5266 or al.lewis@dowjones.com.
Read Al’s blog at .
