Wilhout (he (nspector General's approval.

This document is subject to the provisions orthe Privacy Act of 1974, and may require redaction before disclosure to tbird parties_ No redaction has been performed by the Office or Inspector General. Recipients of this report should not disseminate or copy it wilhout (he (nspector General's approval.

Report of Investigation

Case No. OIG-481

Table of Contents

Introduction and Summ. ary of Inves. tigative Findings and Recommendations

L Introduction

1

II. summary of Investigative Findings and Recommendations

2

Scope of Investi.gation

4

Relevant Commission and Government Regulations and Policies

5

A. . SEC Employees to Maintain Unusually High Standards

of Conduct

5.

B. Duty to Use Goverrunent Property for Authorized Purposes

6

Tbe Commission'S Table of Penalties and Relevaot Case Law

7

Background and Investigative Findings

8

L Results of the Investigation

8

n. Rule 5 of the Commission's Conduct Regulation

9

A. The Mission of the Agency .

9

Restrictions orfSEC Employee Trading in Securities

Designed to Ensure Public Confidence & Prev~nt Real or

Apparent Conflicts of Interest

9

c. Strict Interpretation of Rule 5

1I

Ill. The Rule 5 "Compliance System"

II

~.-'!-

Tbis document is subject to the provisionsoftbe Privacy Act of 1974, and lI13y require redaction hd?,\. disclosure to third parties. No redaction bas been performed by the Office of Inspector General. I~," i~'i ?.,'" of this report should no' disseminate or copy it without tbe Inspector 'General's :approval.

Report of Investigation

Cas,e No. OIG-481

Table of Contents, Con't.

Conduct Regulation Securities Transaction System ("CRST")

It

B. Financial Disclosure Reports

12

I. SEC Form 68-1

12

2. aGE Form 450 Confidential Financial Disclosure Report 13

c. Employees Cannot Clear Securities Transactions on Other SEC

Data Systems Qr Share Information about Why Certain

Transactions are Restricted

14

IV. . Training on Rule 5 Requirements and Confidentiality ofNonPublic

Information

14'

A. Rule 5

14

B. Confidentiality of Enforcement's' Investigations

15

Investigative Findings

I.

Enforcement Attorneys Fail to Comply with ~ule 5

1.6

A. Long-Time Enforcement AttorneYs Share Friendships

16

B. Their Securities Trading and Stock Portfolios

17

C. No Tracking Systems to Ensure Compliance with Rule 5

18

'D. Failures to Report SecuritiesTransactions

19

1. Failure to Consistently File SEC Form 681

19

2

Report of Investigation

Case No. OIG-481

Table of Contents, Con;t.

2. Failul"e to Report Certain Transactions on OGE Form 450 21

E. Other Violations QfRule 5

l. Failure to Clear Transactions

22

2. . Failure to Report? Securities Transactions Timely

23

hnproperly Checking on EDGAR for Company

Infonnation

23

4. Improperly Sharing Clearance Denial Reason with -

Each Other

24

D. Enforcement Attorneys? Frequent Discussions About Securities Trading

and AcCess to Nonpublic Information Raises Concerns and.Creates

Appearance ofhnproprieties

25

A. Enforcement Attorneys? Widespread Access to Noopublic

Infonnation

25

L Enforcement's Office ofChiefCounsel

25

2. The Other Associate Groups

26

B. Enforcement's Confidentiality Policy

27

c. _. Testimony about the Enforcement Attorneys? Ctiaracter

and Integrity

29

D. Enforcement Attorneys Engage in Frequent and Regular

Discussions about Stock Transactions and Work

30

L Long-Standing Regular Weekly Lunches

30

a. Discussions of Stock Transactions

31

3

Report .of Investigation

Case No. OIG-481

Table of Contents, Con; t.

?b. Discussions of Enforcement Matters

32

2. Frequent E-Mail Discussions About Stocks During Work:

Day Violates Commission Policy on E-Mail Use and

Raises Concerns

33

E. [!l:. I] ~ecommends Stocks to Family from SEC E-Mail

Address

37

F. Admitted Risks ofTrading on Nonpublic Information

40

.-m. Enforcement Attorneys' Trading in Stocks Being Investigated by fler

Assistant? Group Has Appearance of Conflict and Impropriety

41

AC A J

42

B. L

i

.-'.

43

IV. Enforcement Attorneys Both Trade in Company Friend Told Them Was Being Investigated by Enforcement in Three Separate Investigations 44

V. Inadequacy and Inefficiency of the Rule 5 "Compliance System"

?45

A Enforcement Attorneys Never Questioned about Stock Holdings 45

B. "No True Compliance System"

47

Rec:.emuielld!ltioB5 & CODdusioD

49

4

This document is subject t~ tbe provisions of the Privacy Act or 1974, and may require redaction before disclosure to tbird parties. No redaction bas been performed by the Office of Inspector Generat Recipients of this report should not disseminate or copy it without the lnspector Genenal's approvaL

REPORT OF INVESTIGATION

UNITED STATES SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

Case No. OIG-481

Employees' Securities Transactions Raise Suspicions of Insider Trading-and Create Appearances of Impropriety; Violations of Financial Reporting Requirements; and Lack of SEC Employee Securities Transactions Compliance System

Introduction and Summary of Investieative Findines and Recommendations

L

Intraduction

On Janu~ 23, 2008, the Securities and Exchange Commission ("SEC" or "Commissionn )

Office of Inspector General ("OIGn) opened an investigation after the Ethics Office, in the SEC's

Office of the General Counsel ("OGC"), informed the SEC OIG that C -#- '2...

-,

- , ,J~~~ J contacted their office to get clearances to trade certain securities. [ -#::J.. ;frequent contact'

with- the Ethics Office raised suspicions that she may be engaged in day trading or insider trading _

and that she may have violated the Commission's Conduct Regulation Rule 5 ("Rule 5"), which

places certain restrictions on SEC employees' securities transactions.

J The OIG began an investigation into ~ 2 'securities tra.di~g. During the course of

that investi{t3tion, the OIG identified two other Enforcement attorneys wbo, were friends with

[~J... 'J,and traded in securities, and who ofte~ discussed securitieS.t~actions and open '

..

Enforcement investigations with each other- during regular weekly lunches and via e~mail.

r .,.. .J Following a r~view of

z SEC e-mail records, the OIG also obt;i'nt? ................
................

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