Insider Trading At The SEC??

The abbreviated definition of insider trading is: “the buying or selling of a security by someone who has access to material, nonpublic information about the security.”

Well who could possibly be more “inside” than an individual who is in the position to take action against a company, that is employees of the Securities and Exchange Commission?

In another edition of “You Can Not Make This Stuff Up”, a recent paper highlights how superb employees at the SEC are in terms of their stock trading and specifically their stock selling skills. Let’s navigate.

. . . results suggest that SEC employees potentially trade profitably under the new rules, and that at least some of their profits potentially stem from trading ahead of costly SEC sanctions and on privileged non-public information. In short, it appears that SEC employees continue to take advantage of non-public information to trade profitably in stocks under their regulatory purview.

Think the recently convicted SAC trader Matthew Martoma might have liked the cover provided by SEC rules allowing employees to liquidate positions prior to a potential action being brought against a company?

When confronted by the findings in this paper, SEC officials were initially mute prior to releasing the following statement as highlighted by The Washington Post:

“Each of the transactions was individually reviewed and approved in advance by the Ethics office,” said John Nester, spokesperson for the SEC. “Most of the sales were required by SEC policy. Staff had no choice. They were required to sell.”

The requirement is based on the premise that an SEC official cannot work on a case while owning stock in the company in question.

In my opinion, that rule does not come anywhere close to passing the smell test. Employees primarily within the SEC’s Enforcement Division should either liquidate all individual stock holdings upon time of employment and/or freeze all holdings and trading of stocks until time of departure.