SEC Slaps Trade Ban on Staff

Rules Follow Investments by 2 Agency Lawyers; a Blocked Deal Spurs a Cry of 'Yuckola'
Wall Street Journal
By KARA SCANNELL
2009/05/29
WASHINGTON -- The Securities and Exchange Commission imposed tough new rules on trading by employees, following an investigation into the dealings of two veteran enforcement lawyers.
The rules will, for the first time, prohibit staff from trading securities of companies under SEC investigation regardless of whether employees have personal knowledge of the investigation. Staff will also be required to have their brokers supply trading statements to the SEC so that ethics officers can confirm that employee reports are accurate.
The SEC's inspector general disclosed the trading of the two lawyers in a 50-page report released earlier this month and referred them to prosecutors for further investigation. They haven't been charged with any crime, and deny any impropriety. According to the report, the two mostly followed the SEC rules but didn't report some trades. The inspector general called the rules confusing and inadequate.
The report didn't name the two employees. The Wall Street Journal has identified them as veteran SEC lawyers Glenn Gentry and Nancy McGinley.
The two friends, referred to in the redacted version of the SEC report respectively as #1 and #2, had a standing lunch date on Mondays where they talked stocks and politics, according to the report. They shared what the report called "a passion" for financial markets, and spent a good part of their work day emailing each other with stock ideas.
"Oh yuckola!" Ms. McGinley wrote in a 2007 email, according to the report, when SEC rules blocked her friend from making a trade.
The case is highlighting broader issues at the agency that is charged with ensuring the fairness of U.S. stock markets. The SEC has come under fire for missing risky transactions at big Wall Street firms during the boom years and failed to catch confessed Ponzi schemer Bernard Madoff, among other things.
Ms. McGinley's lawyer, Adam Augustine Carter, confirmed that his client is the subject of a probe and said she did nothing wrong. The inspector general cited trades Ms. McGinley made in companies' shares around the time those companies were facing SEC probes. The lawyer said those trades took place either before any SEC investigation started, or after the investigation was "publicly disclosed and widely discussed in the press."
There is "absolutely no basis in law or in fact for the IG's statements that the transactions could have been improper in any way," Mr. Carter said. "The SEC's inspector general apparently considers speculation and innuendo as evidence."
Mr. Gentry, whose identity was confirmed by lawyers familiar with the matter, didn't respond to phone calls or emails. In the report, he was quoted as denying making trades with nonpublic information.
The two were active stock traders compared with others at the agency, officials say, and they filled out most of the required paperwork, though with some lapses. For example, the SEC report said, Mr. Gentry failed to file forms for three stock transactions. The inspector general also found that both failed to report certain cases where they earned more than $200 in income, as rules require.
Many current and former SEC enforcement attorneys said they shy away from buying individual shares to avoid the appearance of a conflict. But the probe has revealed a breakdown in compliance. Employees should get clearance for individual stock trades and report them within five days. The SEC's clearance system is designed to identify a company that has business pending before the agency and is therefore off-limits for trading. But the report found that it's often out of date.
No one person is charged with reviewing forms or monitoring trades. Those supervising Mr. Gentry and Ms. McGinley never questioned their stock holdings, even though reports filed by Ms. McGinley showed she traded more than 200 times in two years, according to the report.
Ms. McGinley and Mr. Gentry are career employees who work at Washington headquarters. Both make more than $167,000 a year, according to the inspector general.
Mr. Gentry is considered inside the agency to be a smart lawyer and hard worker. He works in the enforcement division's chief counsel office, whose lawyers help colleagues with legal theories as they build cases.
Mr. Gentry, 50, attended the University of North Carolina at Chapel Hill for both his undergraduate and law degrees. He was admitted to the bar in 1984 and joined the SEC.
Ms. McGinley, a 57-year-old staff attorney, joined the agency in 1981 after graduating from the University of Texas and has stayed there since.
She has worked on a handful of high-profile cases. One involved a San Diego software company that had to restate its revenue by $509 million after the SEC charged it with inflating revenue. The case resulted in two guilty pleas by executives accused of insider trading. In 1983, she was part of the group that filed insider trading charges against University of Oklahoma head football coach Barry Switzer and others. A federal judge threw out the case, citing "an absolute lack and paucity" of evidence.
In the mornings before work, and again in the evenings, Ms. McGinley watched financial-news programs, the report said. At times she plugged in the stocks on her laptop to research them.
Ms. McGinley and Mr. Gentry emailed "on most days," the report said. During one discussion about a company, Mr. Gentry exchanged 15 emails with Ms. McGinley from January through April 2006. He had made his first investment in the stock on June 24, 2002.
"But this still kills me," he wrote in an email dated Feb. 1, 2006, to Ms. McGinley. The company "was one of my best ideas in years and I knew it at the time -- but couldn't buy more because of a damn case. (As I may have whined about before.) I would have bought at least $10K worth back then. Basically 2000 shares instead of 200."
One trade being looked at is Ms. McGinley's liquidation of her holdings in UnitedHealth Group Inc., say people familiar with the matter. Two months after her sale, the SEC opened an investigation. That probe was handled by a lawyer who worked in the same large group but wasn't within the same reporting line.
On Nov. 8, 2007, Mr. Gentry received an email from the SEC's assistant ethics counsel saying trading in a security was restricted. He forwarded it to Ms. McGinley.
She wrote back: "Oh yuckola! I wonder if this is the proposed merger that [redacted] got fired over because he hadn't told the board about it! Wouldn't that be a hoot?" The report redacted the name of the company they were discussing.
The SEC's rules against certain types of trading, including trading of options and futures, are stricter than those at many federal agencies and private companies. But the SEC lacks the surveillance systems in place at brokerage firms to monitor employee trading.
SEC Chairman Mary Schapiro said the changes she announced Friday will address the compliance breakdowns. The new policy has been submitted for approval by the Office of Government Ethics.
"It only makes sense that we have a world-class compliance program -- just as we expect from those we regulate," she said.
Mr. Gentry owned between 15 to 20 stocks valued at about $150,000 in October 2008, according to the report. He traded about 14 times from January 2006 to January 2008. The report said Ms. McGinley traded 247 times over the same period and owned $167,732 in securities according to her June 30, 2008, brokerage statement.
Mr. Gentry conceded that he doesn't keep good records of his clearance reports or trading records, according to the report. The report claims that he also told the inspector general that he didn't keep a list of matters he has worked on.
He sent stock investment ideas to his brother and sister-in-law, according to the report. In late 2007 and early 2008, he sent them five emails discussing stocks. More than once he noted that his "stock watching friend" had told him about the idea, according to an email referred to in the report.