SEC official aided in Ponzi scheme, agency's watchdog finds
Tuesday, December 1, 2009
A Securities and Exchange Commission official received full retirement benefits and a $25,000 buyout package from the agency despite assisting a Ponzi scheme operator in Arizona who later was fined for defrauding investors, according to a new report by the agency's watchdog.
The report by the SEC's inspector general says there was no evidence to suggest that the employee in the SEC's Office of Administrative Services knew she was abetting a fraud. But the report claims that the employee, who wasn't named, violated agency rules by allegedly using government equipment and her government e-mail account to help an outsider carry out his private-investment business.
The inspector general's office said it referred the case to the Justice Department's criminal division for possible prosecution and to the SEC's Division of Enforcement for investigation. The Justice Department declined to prosecute.
The apparently unwitting involvement of an SEC official in a Ponzi scheme is described in summary form in Inspector General H. David Kotz's semi-annual report to Congress.
According to the report, Arizona authorities alerted the SEC's inspector general to the SEC employee's potential role in the scheme in November 2008.
Several months later, in June, the Arizona Corporation Commission announced that it had ordered a Scottsdale numerologist and spiritual adviser to pay more than $300,000 in fines and restitution for fraudulently selling investment products, promising he could predict the future.
At least 65 people invested in the products. The Ponzi operator admitted to violating Arizona securities laws in his settlement with the state.
The report offers just a general description of the SEC employee's role. It says the supervisor "was extensively involved in handling the payments to and from his [the Ponzi operator's] victims, and used her SEC e-mail account to communicate directly with those victims."
Investigators claimed that the SEC employee used her e-mail to conduct business on behalf of the Ponzi scheme on nearly a daily basis, the report says. In addition to that investigation, the inspector general's semi-annual report offers an update on the status of several other inquiries.
The report says the inspector general concluded its well-publicized probe into whether the SEC's enforcement director, Linda Thomsen, inappropriately provided information to her former SEC boss, Stephen Cutler, counsel of J.P. Morgan Chase, amid negotiations about whether to buy Bear Stearns in March 2008.
The report doesn't name Thomsen and Cutler, but their identities were confirmed by a source familiar with the matter. The source spoke on the condition of anonymity because details of the probe have not been publicly released.
"We found that while [Cutler] did not receive the broad assurances for the acquiring investment bank that he sought, he did receive some assurances with respect to ongoing and potential investigations related to the pre-acquisition conduct of the target investment bank," the report says.
The report says that while Thomsen's communication with Cutler did not violate SEC policy on external communications, she should have taken other steps "to avoid an appearance of impropriety stemming from the relationship."
The inspector general recommended that the SEC clarify what types of non-public information enforcement officials may release on their own discretion.
Though the discussion between Thomsen and Cutler was private at the time, J.P. Morgan made a public request that it shouldn't be held accountable for potentially improper actions taken by Bear Stearns.
In another inquiry, the inspector general's office said it was asked by the Office of Compliance Inspections and Examinations to investigate whether SEC staff leaked draft copies of a report on credit-rating agencies to the Wall Street Journal. The probe looked at more than 100,000 internal agency e-mails to see who might have been the source of the leak, but found there was no evidence that a SEC staff member provided the information.