The SEC is alleging that a former staffer engaged in securities fraud via options and other securities.
SEC officials report that they have charged David R. Humphrey, a former commission employee, with securities fraud in connection with his trading of options and other securities.
At the SEC, Humphrey, a certified public accountant, was employed as a staff accountant. Later, he became branch chief in the SEC division of corporation finance.
Humphrey, who also has pled guilty to U.S. criminal charges arising from making false federal filings, allegedly enlisted his own mother in his multi-year securities fraud scheme.
The SEC alleges that he “concealed his personal trading from the SEC’s ethics office and later misrepresented his trading activities to the SEC’s Office of Inspector General when questioned during an investigation.”
Additionally, the U.S. Department of Justice reports that Humphrey, a 60-year-old resident of Vail, Arizona, is scheduled to be sentenced this August on the criminal charges stemming from those false federal filings.
The SEC notes that, at the commission, Humphrey “received extensive training from the Ethics Office about the ethics rules governing securities holdings and transactions by SEC employees. The ethics rules, among other things, constrained his ability to buy or sell securities; required him to pre-clear and report transactions and holdings in certain types of securities; [and] required him to hold certain securities for a certain period of time before he could sell them.” Overall, he was “subject to a panoply of ethics rules governing securities holdings and transactions,” the SEC complaint observes.
“As alleged in our complaint, Humphrey never sought pre-clearance for his prohibited options trades and he filed forms that falsely represented his securities holdings,” Gerald W. Hodgkins, associate director in the SEC’s division of enforcement, says in a statement.
Specifically, beginning in August 2010, “as an SEC employee Humphrey was also prohibited from buying or holding the securities of any company directly regulated by the SEC,” and was required to obtain pre-clearance from the Ethics Office before trading in any non-prohibited securities.
However, Humphrey, says the SEC, “ignored the ethics rules and engaged in a multi-year scheme to trade in options and other prohibited securities on his own behalf and on behalf of his mother and a childhood friend.”
Humphrey engaged in prohibited trading for his own account, often using his SEC computer during business hours, from approximately 2001 until late 2009, and from late 2012 through his August 2014 departure from the commission, according to the complaint.
His trading strategy, says the SEC, “involved writing uncovered options against an index [and] occasionally an individual stock,” the complaint alleges. “Humphrey would receive proceeds, or ‘the premium,’ for selling the option with the hope that the option would expire worthless [and] Humphrey would retain [the premium]. If the market moved against him, Humphrey could be forced to buy or sell the underlying security, often at a disadvantageous price. This happened on a number of occasions and, on offsetting those underlying positions, caused significant losses.”
“During this time, Humphrey took affirmative steps to conceal his trading from the Ethics Office and others,” the complaint charges.
Those others included E*Trade, through which he traded, and TD Ameritrade, at which he traded in the name of a “friend.”
When E*Trade asked for his employer and business telephone numbers, Humphrey “did not disclose that he worked for the SEC and he did not provide his SEC telephone number as his business number. Rather, Humphrey wrote that he worked for the ‘Federal Government’ and he provided his cell phone number,” according to the complaint.
The SEC calls the friend in whose name the Humphrey made the TD Ameritrade trades, an “unsophisticated investor,” with a “limited knowledge of securities trading and no personal experience trading in options.”
“Significantly, [Humphrey] never sought pre-clearance from the Ethics Office for these [E*Trade] trades and he filed forms with the Ethics Office that falsely represented his securities holdings. He also made misleading representations on forms filed with broker-dealers and he failed to disclose to [the friend that he involved in his scheme] that this trading violated government ethics rules and would result in his submitting false annual certifications of his trading activity to the SEC.”
Furthermore, when confronted by agents of the SEC Office of Inspector General in 2014, Humphrey “falsely denied that he had traded in options or in his mother’s brokerage account while employed at the SEC.”
Humphrey will “settle the charges and pay $51,917 in disgorgement of profits made in the improper trades plus $4,774 in interest and a $51,917 penalty,” according to the commission. He has “also agreed to be permanently suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The settlement is subject to court approval.”
FTF News contacted the Washington office of Humphrey’s attorney, requesting comment. By press time there had been no reply.
To see the entire SEC complaint against Humphrey go to: http://bit.ly/2pRAxue
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