SEC Staff Sold Shares Before Enforcement Actions in Securities Cases Were Made Public, Reports Study

Bloomberg is reporting that according to a new study, US Securities and Exchange Commissioner employees who own stock in companies that the agency is investigating are more likely than other investors to sell their shares in the months prior to the regulator’s announcement of an enforcement action. Shivaram Rajgopal, an Emery University accounting professor, and one of the study’s co-authors, said that there appears to be a suspect pattern of behavior going on even though the findings are not proof of misconduct.

Rajgopal and co-author Roger M. White, a Georgia State University doctoral student, obtained records from the SEC through a request they made under the Freedom of Information Act. Unfortunately, because individuals weren’t named, it was impossible to figure out whether the agency employees who traded were in jobs that might have given them insider knowledge about a pending action, and whether the action could lower stock prices, or if money was lost or made in the transactions.

Beginning August 2010, SEC ethics rules have forbidden employees from selling or buying shares in companies that are under investigation. They also have to get permission before trading, cannot trade in any financial firm that the SEC directly regulates, and they generally must hold any stock that they buy for six months before selling.

White and Rajgopal looked at 7,200 recorded trades from 2009, the year when most of the Commission’s employees were required to start notifiying the agency about their trades and investments, through 2011. Per the SEC data they obtained, Commission employees with shares in JPMorgan Chase & Co. (JPM), General Electric Co. (GE), Citigroup Inc. (C), Bank of America Corp. (BAC), and Johnson & Johnson made 87 trades in shares in the three months prior to the SEC announcing that the companies had agreed to settle enforcement claims.

As an example, prior to the SEC’s announcement that Bank of America would pay $150 million in 2010 to resolve securities claims that it misled shareholders about losses and bonuses while Merrill Lynch (MER) was acquired, over 70% of SEC employee trades were sell orders. Rajgopal noted that while some of the sales may have been done to comply with ethics rules regarding prohibited stocks, the timing was questionable.

The co-authors, offering a broader analysis of all the trades, noted that profits typically didn’t come from selecting stocks but were from excess returns, which seemed to be a result of selling shares that later dropped in value in relation to the wider market. Rajgopal and White say that this could mean that SEC employees may have sold shares belonging to companies they knew were under investigation even if the probe had not yet been made public.

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Study Finds SEC Staff Sold Shares Before Cases Made Public, Bloomberg, February 27, 2014

Freedom of Information Act

Securities and Exchange Commission

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