S.E.C. Faces Fresh Scrutiny Over Trading Inquiry at Lehmanby GRETCHEN MORGENSON, nytimes.com
February 22nd 2009
The Securities and Exchange Commission, under fire for failing to heed warnings about the Ponzi scheme that was apparently run by Bernard L. Madoff and lasted for decades, is now under scrutiny for its handling of insider-trading accusations involving former executives at Lehman Brothers.
In a letter sent to the commission last Thursday, Charles E. Grassley, the Iowa Republican who is the ranking member of the Senate Finance Committee, asked Mary L. Schapiro, the chairwoman of the S.E.C., whether it had followed up on allegations that were brought to its attention last spring involving a unit at Lehman Brothers. Employees in the unit, known as the Product Management Group, appear to have tipped off clients and traders about the content of the firm’s research reports before they were released, a former Lehman analyst said.
The letter does not disclose who might have received the tips, if they were made.
The insider trading allegations, and more than 4,000 e-mail messages relating to them, were presented to Linda Thomsen, the former director of enforcement at the S.E.C. last April by Ted Parmigiani, a former analyst at Lehman who followed the semiconductor industry. According to Mr. Grassley’s letter, Mr. Parmigiani spoke with high-level enforcement officials several times both on the phone and in person. An in-person meeting on April 30, 2008, lasted for six hours, the letter said.
Mr. Parmigiani, who was dismissed by the firm in June 2005 for what it said were performance issues, declined to comment. John Nester, a spokesman for the S.E.C., said he would not discuss whether Ms. Schapiro had responded to Mr. Grassley’s letter or the allegations made by the former analyst. But he said in a statement: “We certainly share the senator’s interest in vigorous enforcement against illegal insider trading.”
Mr. Grassley noted in his letter that his staff had examined the materials given to S.E.C. enforcement lawyers by Mr. Parmigiani and that “there are many documents that raise suspicions of insider trading.” The e-mail messages and other documents appeared to provide “ample detail to assist in launching an investigation,” Mr. Grassley wrote.
But the matter appears to have gone nowhere within the S.E.C, the senator contends. “It is unclear whether the S.E.C. has issued a formal order authorizing the enforcement staff to subpoena records and take sworn testimony,” Mr. Grassley wrote. “In light of the S.E.C.’s failure to follow up on repeated warnings about the Madoff Ponzi scheme, I must inquire as to whether these allegations are being acted upon.”
Mr. Grassley has asked that the S.E.C. brief him privately by the end of this week on any actions it has taken to investigate the analyst’s allegations.
According to the letter, the documents provided by Mr. Parmigiani indicate that officials in Lehman’s Product Management Group routinely received research reports before they were made public. The case also raises questions of whether the content or gist of the reports was disseminated to select traders in advance.
When they are published, Wall Street research reports often cause a stock or sector to rise or fall. The Lehman group was in charge of coordinating and broadcasting calls that disclosed new research reports and changes in coverage or analysts’ opinions.
Tipping off traders to nonpublic information is illegal. And regulatory rules governing securities firms forbid employees who are not directly involved in the compilation of research reports, other than legal or compliance officials, to review them before publication.
One example cited by Mr. Grassley in his letter involved a company called Amkor Technology, a semiconductor concern followed by Mr. Parmigiani. A series of e-mail messages from June 2005 indicated that in the hours after he submitted a bullish report on Amkor to the Product Management Group, but before the report was made public, the company’s stock began actively trading and rose 12 percent.
A second case mentioned in the letter involved an e-mail message from a sales executive indicating that he had advance knowledge of a change in another analyst’s rating on a separate company. The sales executive advised Mr. Parmigiani in the message dated March 2005 that he could not attend a meeting because of a “big ratings change looming.” Later that day, Lehman downgraded Commodity Chemicals, a supplier and exporter of basic chemicals.
The e-mail, Mr. Grassley wrote, seems to demonstrate that this particular executive may have illegally obtained prior knowledge of the Commodity Chemicals downgrade and had acted upon it.
Ms. Thomsen, who received Mr. Parmigiani’s materials and discussed their content with him, left the S.E.C. this month after being criticized for failing to pursue enforcement cases and tips assiduously. Robert Khuzami, a former federal prosecutor in Manhattan, was appointed to succeed her as director of enforcement last week. Lehman Brothers filed for bankruptcy in mid-September, a victim of the credit crisis.
Mr. Grassley has been frustrated by the S.E.C.’s response to insider trading allegations before. In 2006, investigators for Mr. Grassley aggressively pursued accusations made by Gary Aguirre, a former staff lawyer at the S.E.C., that his superiors had thwarted his attempts to investigate possible insider trading at Pequot Capital Management, a major hedge fund, and then fired him when he complained.
The S.E.C.’s investigation into Pequot was closed in 2006 without any actions taken. But a 108-page report issued by the Senate Finance and Judiciary Committees in 2007 found that agency officials had bungled the Pequot investigation by delaying it, by disclosing case information to lawyers for those under scrutiny in the case and other missteps.
The office of the inspector general at the agency also investigated Mr. Aguirre’s allegations. In a report issued last year, it concluded that enforcement officials involved in the matter “conducted themselves in a manner that raised serious questions about the impartiality and fairness of the insider trading investigation.”
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