By Zachary A. Goldfarb
Washington Post Staff Writer
Sunday, May 17, 2009
A Securities and Exchange Commission official attempted "to intimidate and influence" a family member's broker on multiple occasions by invoking her position, potentially violating agency rules, according to the agency's inspector general.
The allegation, detailed in a report reviewed by The Washington Post, is one of several that have raised questions about the internal conduct of some SEC employees at a time when the regulator is trying to counter accusations that it failed to effectively police Wall Street.
Another investigation found that some of the agency's enforcement lawyers may have traded the stocks of Citigroup, United Health Group and other firms around the time the agency opened investigations into the companies.
The inquiries come as the SEC is trying to lift its image out of a morass created by its failure to stop Bernard L. Madoff's massive fraud or prevent the collapse of major Wall Street banks the agency regulated.
In the case of the SEC official who acted on her mother's behalf, investigators said the official, deputy secretary Florence Harmon, allegedly yelled at a Morgan Stanley broker over a disagreement and told him of her position at the agency. She later told a bank executive that he "should have Googled her name before he spoke with her," according to the report.
The broker told investigators she was trying to "bully him" and informed higher-ups at his firm. The inspector general, who didn't name Harmon but listed her position, referred the administrator for disciplinary action, up to and including dismissal. Her name was confirmed by an official. She continues to hold her post.
An SEC spokesman declined to comment on the case and said Harmon was unavailable. Attempts to reach her at home and at the office were not successful.
For months, a top federal lawmaker and the SEC's internal watchdog have been questioning whether the agency can adequately address possible violations of rules by employees. The SEC acknowledges that it is working to reform its internal practices.
Sen. Charles E. Grassley (R-Iowa), who released a heavily redacted version of the stock trading investigation last week, said the SEC must do better.
"Without a reliable compliance system, the SEC can't know whether this is an isolated incident or a widespread problem," he said in a statement. "The SEC needs a better system to deter misconduct and give the public confidence that this sort of thing isn't a systemic problem."
The SEC's inspector general, H. David Kotz, has tangled with the agency frequently since his appointment in 2007. He summarized the investigations in reports The Post requested through the Freedom of Information Act. In the report on the suspicious stock trades, he recommended the agency adopt new protections to guard against abuses.
"[T]he Commission has essentially no compliance system in place to ensure that Commission employees, with the tremendous amount of non-public information they have at their disposal, do not engage in insider trading themselves," he wrote in the report.
SEC spokesman John Nester said the agency is working to improve its compliance systems. "We have been taking additional steps to enhance our protections against the potential for improper conduct," he said, including acquiring a new computer system to report trading by SEC employees, hiring a chief compliance officer and clarifying rules. A new SEC chairman, Mary Schapiro, started in late January.
Nester added that the report on the stock trades "neither accuses any SEC employee of insider trading nor concludes that any such conduct took place." It alleges there may have been suspicious trading, but it does not level any formal accusation.
The SEC inspector general's office has opened other cases as well. It is investigating allegations that a top SEC official committed perjury in a letter to a senator and in court when discussing efforts to curb short-selling. Kotz is also looking into allegations that a top agency lawyer took part in an investigation in which he had a conflict of interest, according to a recent report summarizing ongoing probes.
The office began investigating potential abuses by the SEC's deputy secretary two years ago. The report alleged that Harmon repeatedly called a Morgan Stanley branch office about her mother's account, revealing herself to be a top SEC official "in an attempt to intimidate her mother's broker and other Morgan Stanley staff," the report said.
The SEC secretary's office oversees the legal review of all documents submitted to and approved by the commission, and also provides advice on practices and procedures.
The report said much of the account of the incidents came from Harmon's own admission. The SEC has a policy against officials using their positions for private gain. It's not known whether the SEC has begun to take any formal action.
Harmon told the SEC that she had phoned the Morgan Stanley broker because she had questions about decisions he was making regarding her mother's account. She told investigators she identified herself as an SEC official because the broker "was making statements to me that I thought were very incriminating," according to the report.
"When they start to say things that I think they could be reported for, I think I would appreciate it, if I were them, if I know where the person worked," Harmon told investigators in explaining why she repeatedly referred to her job.
The deputy secretary's boss told investigators she had told Harmon that "you need to keep your personal business separate from work."
In one inquiry into stock trading in recent years, SEC investigators found that two months before an investigation into a large health-care company was opened by her group, one employee sold all of her shares in the company. The employee also sold all shares in an oil company's stock days before her colleague, sitting in a neighboring office, opened an investigation into the company. Later, she bought additional shares of the company's stock.
In another case, an SEC employee told colleagues at a lunch that she could not buy stock in Citigroup because of active investigations into the bank. That didn't stop the colleagues from trading in the stock. They told investigators they were not told about the probes.
But they did not properly report trades to the SEC as required, the report said.
One of the employees described trading in stock as a passion. The employees, who were not named, denied to investigators that they engaged in improper conduct. They remain in their jobs.