Mary Jo White’s SEC appears to be taking decisive action against the alleged, undeclared insider trading and controversial influence peddling that Congress has taken for granted for decades. This became abundantly clear when the regulator set its sights on 44 firms that allegedly benefited from Washington, D.C.-based insider trading.
Over the coming weeks and months, the SEC will be piecing together an alleged trail of insider trading that began with a Congressional staffer. The SEC probe will focus on the actions of a top staffer on the U.S. House Ways and Means Committee who allegedly shared nonpublic information about forthcoming changes in healthcare law with a Washington lobbyist on April 1 of this year.
A court briefing countering the SEC’s claims was filed by the House’s top lawyer Kerry W. Kircher, who argues that the SEC lacks the solid evidence tying the committee staffer to the initial source for the chain of events that followed. Kircher argues further that someone in the executive branch could be the source for the insider information.
The alleged link to 44 securities firms came when the lobbyist updated an analyst at research firm Height Securities, which subsequently alerted its Wall Street clients to this pending policy change and windfall for health insurance companies via billions in extra government funding during FY 2014, according to a Wall Street Journal report.
Regulators took notice when stocks in certain health insurance companies slated to benefit from the new policy jumped six percent before the official announcement via the government. (SEC and Height Securities officials decline to comment while the investigation is still active.)
Yet the SEC chair may not be stopping there when it comes to probing the complex relationships that financial services industry participants develop with members of Congress. For instance, the SEC charged one of the top auditing firms in the U.S. Ernst & Young (E&Y) with violating auditor independence rules.
The SEC took issue with the now-defunct Washington, D.C.-based Ernst & Young subsidiary, Washington Council (WCEY), because it allegedly “lobbied congressional staff on behalf of two audit clients,” according to SEC officials.
It’s a no-no to do such lobbying according to the SEC’s auditor independence rules because it could turn auditors into advocates for clients and thus blinding auditors to investors’ concerns.
The events in question happened before 2009 and E&Y agreed to pay $4.07 million in monetary sanctions to settle the charges, though, the firm neither admits nor denies
guilt.
“EY takes great care to ensure our services for audit clients conform to all applicable SEC and PCAOB [Public Company Accounting Oversight Board] rules,” an E&Y spokesperson says in a prepared statement. “We regret these instances that arose many years ago and are pleased to put this matter behind us. In 2012, EY voluntarily decided to cease performing lobbying work for SEC registrant audit clients.”
I’m certain that E&Y’s peers took notice not only of the action but of the fact that the SEC chair, nearly 18 months into the job, is putting Washington on notice that there’s a new sheriff in town.
While many are making the argument that the regulator via its limited resources should be focusing on other areas that are more pressing, it’s important for the SEC to sort out its own backyard. The ties between Wall Street and Congress have gotten very cozy – maybe a little too cozy for comfort.
We may find out in a few months if this coziness has severe consequences.
Need a Reprint?
Leave a Reply