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SEC Report: Employees Browsed Porn, Ran Private Businesses

 The Securities and Exchange Commission is taking a drubbing these days for its abject failure―despite detailed tips―to catch Bernie Madoff in what appears to be the biggest Ponzi scheme in our nation’s history.

Now, thanks to little-noticed report from the agency’s inspector general, we have a detailed glimpse into other bad behavior by some SEC employees.

The report, released the day after Thanksgiving, reveals that some employees at the agency were clearly preoccupied with matters other than their mission of “protecting investors and maintaining fair, orderly, and efficient markets.” The semi-annual report to Congress, which covers the period from this past April to September, details among other things a handful of employees circumventing internal controls to download porn. Let’s pause for some detail:

[Investigators] uncovered evidence that an employee who was still in his probationary period had used his SEC laptop computer to attempt to access Internet websites classified as containing pornography, resulting in hundreds of access denials. The OIG investigation also disclosed that this employee successfully bypassed the Commission’s Internet filter by using a flash drive.

Presumably, that’s not the kind of initiative the SEC is looking for.

There were also more serious misdeeds raised by the report. For example, there is the case of the senior-level commission employee who “clearly and purposefully identified herself as a Commission employee when dealing with brokers about a family member’s account,” making the broker in question feel like she was trying to “intimidate and bully him.” The OIG referred the matter to management for “disciplinary action, up to and including dismissal.” By the end of the period covered in the report, management “had not proposed or taken action.”

There are other examples where the punishment was less than fulsome.

Investigators found employees in separate offices operated private photography businesses out of the commission:

An employee repeatedly and flagrantly used Commission resources, including Commission Internet access, e-mail, telephone and printer, in support of his private photography business for several years.

The IG’s office recommended “disciplinary action up to and including dismissal.” In turn, the report notes, “management suspended the employee from duty and pay for nine calendar days.”

When asked about the report, Deputy Director for Public Affairs John Heine said, “In each of these [cases] there is some sort of response from the Commission. We don’t have anything to say beyond that.”

The report reveals also that two commission staffers employed as attorneys didn’t have active bar memberships. One attorney let his bar license lapse in 1994. The report said one of the lapsed lawyers “submitted a declaration in Federal court, in which he stated that he was an attorney employed by the SEC. We referred the potential false statement or perjury to the applicable United States Attorney’s office.” (The office declined to prosecute.)

The IG also found that the commission did not have a sufficient system in place to “prevent and detect insider trading on the part of Commission employees or violations of the Commission’s rules.”

The agency’s information management also comes in for criticism. An employee survey conducted by the inspector general revealed that employees failed to enter data into a computer system used to manage investigations.  The system known as the HUB was launched in August 2007 after the Government Accountability Office had highlighted major problems with the SEC’s previous case management and tracking system. The IG semi-annual report also reveals that the commission lacks “an inventory of its laptops and was unable to trace ownership of laptops to specific individuals.”

Here at ProPublica we’ve just begun working our way through the fascinating 95-page document.  Take a look at it yourself and let us know what you find.

This is what the media hacks should be talking about, but no they just what to connect OBAMA to the ILL. gov. and persuade the gay and lesbian community that OBAMA has sold them out. They should talk about how BUSH has
appointed all his croonies and friends to head all the cabinets and commission jobs, and not one of them have done their jobs.All they did was get rich and left the country in chambles.The republicans can’t figure out why their party is dog food and dead.

I have read most of the report. I think your article missed the point. The pornography downloading didn’t indicate widespread employee frivolity, it was an illustration of the lack of an adequate IT infrastructure at the agency. It is a trivial issue. One can see typical bureaucratic breakdowns. The worse they indicate is a lack of focus and inadequate funding for the job at hand.

The heart of the problems at the agency was its failure to monitor and stop the dangerous leverage at Bear-Sterns and the other investment companies that it was supposed to be watching. There was a loophole that allowed these firms to avoid the Commission’s net capital rule by becoming a CSE (Consolidated Supervised Entity). All the big firms Bear Stearns, Goldman Sachs, Morgan Stanley,  Merrill Lynch, and Lehman Brothers were getting through this loophole which allowed them to increase their “asset”-purchase to liquidity-reserve ratio. The report by the OIG of the SEC whitewashes this defect by noting how everbody was following the rules. The rules were terrible, and the SEC was essentially non-functional. As soon as these “assets” (toxic CDO’s etc.) lost their value and liquidity on the markets in which they were being traded, the loss of billions of investor dollars was unavoidable.

The SEC is a law-enforcement agency, yet, there is no discussion of penalties and real enforcement in this report. They seem to be functioning like a bunch of bank auditors rather than the guardians of the public welfare. The rules governing these firms were absolutely inadequate and there was no effort to tighten them or enforce them. It would be like passing rules that, when bank robbers entered a bank, they should not fire their weapons directly at the employees and that the employees should lead them to the cash without causing
any trouble. As long as they followed these rules they would have no trouble from the government. And, if their were any problems, the SEC would get together with them and counsel them to be more proper in their actions at the next bank they chose to rob.

The myth that permeates this report is that financial wrongdoing will be detected by investors and that they will withdraw their money and punish the wrongdoers without any intervention by the government. Well, some people withdrew their money and the whole financial system collapsed, wiping out billions, perhaps trillions belonging to everybody else. We are living with the painful, nay disastrous, consequence of a government agency enthralled by this myth. This report is not an investigation of the problem. It is an example of the problem.

Steve Jones-D'Agostino

Dec. 20, 2008, 10:02 a.m.

“Oriole” is absolutely, positively correct. To which I add only: These problem SEC employees might have been either caught and punished and/or fired, or motivated to do their jobs had the Oval Office been much more interested in preserving and protecting the American economy than corrupt lobbyists and C-level pals.

I recall a front-page Wall Street Journal article circa 1993 that revealed the “look the other way” culture that had permeated the SEC during the savings-and-loan boom years of the ‘80s, when federal regulators were strongly encouraged by their feckless bosses to let the industry pursue its greed with reckless abandon. I tried unsuccessfully to find it with a Google search. If anyone has a link to the article, please post it in this forum.

Perhaps we should outsource the SEC to the Chinese ;-)

Philip Cardella

Dec. 20, 2008, 8:40 p.m.

I want to agree with the above sentiments. One employee looking at porn is news because would be amazing if there were only one employee at any larger company or organization looking at porn. I guarantee that more than one employee was looking at porn on company time both at the SEC and at Propublica and any other organization you can name. Focusing on that aspect of the story sensationalizes the topic and shines a poor light the journalism this organization says it stands for.

Of all the Light we need to put on the SEC right Now, None needs be wasted on Porn Peepers on the Clock. Least of my concerns, Least of my Outrage.
Cox along with Paulson and Bereneke lead this country into a Ditch.SIX months prior to the Wall Street Collapse Paulson took 5 minustes to compose a 2 1/2 pg Ransom Note. Foresight? Forethought? Malice?
The SEC was repeatedly told about Madoff, from several soruces for years. Ineptituded? Derelict? complicity?
Bait and Switch with the TARP funds. Manuevering? Nepotism? Fraud? Extortion?
Had they immediatley taken those funds and injected them into projects and Middle classs tax rebates, wouldn’t far more bank notes been paid? Would we have spent a bit more for the holidays? What is Wrong with ‘trickle down’ is that those ‘HAVES’ like to keep their circle small- a Small Pool. Yet the only way to get trickle down to work is have the largest Group considered the top (because of their larger buying power)Honstly Paulson, Berrenke and Cox should be facing criminal charges…Malpracitce? Reckless endangerment? Economic Treason?
To me the Wall Street bailout (Not the Big 3 LOAN) was the Crescendo to the Tragic Opera Called Trickle Down Economics- A nasty finale, but brighter future ahead.

I agree with Oriole. The devil is in the running of an organization like the SEC which keeps regulating and telling companies and management how to manage. It needs to be like Caesar’s wife. Which means (just two examples) : 1. Managing IT with a CIO and IT Security with a CISO. ANy company that for a period of time would attempt to run IT without those two key positions filled would be lambasted to no end by auditors and the SEC. Yet the SEC can afford to fly without a pilot. 2. Most egregious and requiring immediate follow up : THE SEC HAS NO MEANS TO MONITOR ITS EMPLOYEES FOR INSIDER TRADING (p.18). How can the regulator have credibility when it ignores its own regulation ?

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