Mark Cuban has apparently devoted some time, like us, to reading the SEC IG’s Semiannual Report to Congress over this holiday weekend. And he has some thoughts about it that he is very happy to share on his “blog maverick” blog. He writes:

It never crossed my mind that it would be legal for employees of the SEC to trade stocks. Not that they shouldn’t have rights to own whatever they want in a trust. They should. Trading individual stocks and bonds. Wow.

There is a SEC policy in place regarding trading and what employees can and can’t do according to this report, but if you know about actions of one company, even if you don’t trade that company, doesn’t that provide you insight into an entire industry ?

But wait there is more. According to this report,

”we have determined that the Commission’s current system in place to report the ownership and trading of securities is insufficient to prevent and detect insider trading on the part of Commission employees or violations of the Commission’s rules.

The OIG investigation has found that the reports that employees are required to file when they buy, sell or own securities are not meaningfully reviewed or sufficiently checked for conflicts of interest. Moreover, there is currently no system in place for the Commission to detect if an employee who has traded or owns a security failed to properly report such transaction. “

Double wow.

He highlights some other bits of dirty laundry in the report, and concludes that it is “no wonder they released it on the Friday after Thanksgiving without any press release to let people know its available….”

Read Cuban’s post on “blog maverick”

Read the SEC IG’s Semiannual Report to Congress

As widely reported last week, Brenda Murray, the Initiating Official tasked with reviewing and acting on the disciplinary recommendations of the SEC’s Inspector General in two high-profile matters, rejected the IG’s calls that discipline be imposed on several senior Enforcement officials. In separate reports dated November 7, 2008, Murray found that the IG’s Reports of Investigation did not support his conclusions in the Pequot/Aguirre matter or the W Holding Co./Bear Stearns matter, and that there was no basis in either case for following the IG’s recommendation as to disciplinary or performance-based action.

This flat-out rejection of the IG’s recommendations in both matters immediately drew a range of public responses. SEC Inspector General H. David Kotz, whose office conducted the investigations, issued a statement that his office was “surprised and disappointed by the administrative judge’s decisions…. We believe her findings were flawed and not supported by the evidence. We also have serious concerns about the process utilized in arriving at these decisions. We stand by our comprehensive and thorough reports 100 percent.” Mr. Kotz declined to elaborate on his statement above for this article.  U.S. Senator Charles Grassley, the ranking minority member of the Senate Finance Committee who helped initiate a re-investigation of the Aguirre matter, stated that “[i]t looks like the lawyers for the wrongdoers wrote the decisions.”

Privately, people at the SEC with knowledge of the matter go even further, stating that they are “stunned” by Murray’s decisions and the process that she used. An SEC official told me that Murray did not follow the standard procedure used by Initiating Officials in disciplinary matters, which is to examine only the record laid out in the IG’s report itself and decide based on that record whether disciplinary action is appropriate. If discipline is appropriate, the standard procedure is for the Initiating Official to draft a recommendation as to the type of discipline and then (and only then) seek comments and input from the subjects of the potential discipline.

To the contrary, for the two decisions she issued last week, Murray is said to have used a process that the SEC official with whom I spoke stated he had never seen in his many years of experience with a large number of cases. According to this official, Murray went outside the report, re-opened the record, and re-examined the facts by soliciting new statements from the subjects of the disciplinary recommendations. The official stated that it appeared that Murray made her decision that discipline was not appropriate based almost exclusively on the one-sided information she received from counsel for the various subjects. Notably, this information was not subject to any cross-examination or any follow-up by the IG’s office or other parties involved, and additionally was not provided under oath. The official stated that in his experience, such re-opening of the record is simply never done.

After an investigation by the SEC Inspector General concerning allegations by Gary Aguirre that his supervisors in the Enforcement Division gave preferential treatment to the Chairman and CEO of Morgan Stanley in an investigation, the IG concluded in a report dated September 30, 2008 that senior Enforcement officials including Director Linda Thomsen should be disciplined. The IG investigation took eight months; involved the testimony or memoranda from 51 separate witnesses including five separate testimony sessions of Aguirre; involved the review of thousands if not hundreds of thousands of emails and documents; and ultimately resulted in a 191-page report.

In another IG investigation that resulted in a separate report also dated September 30, the IG concluded after an extensive investigation that SEC Regional Director David Nelson failed to vigorously enforce compliance with securities laws in connection with the W Holding Company, Inc. and Bear Stearns investigation.  The IG recommended that Nelson be subject to disciplinary and/or performance-based action.

On Friday of last week, SEC Administrative Law Judge Brenda Murray rejected any and all disciplinary action in either of the cases.  In the Bear Stearns case, Judge Murray wrote in a 9-page decision that “the IG’s Report of Investigation does not support his conclusions,” and that there was “no basis for following the IG’s recommendation as to disciplinary or performance-based action.”  Similarly in the separate Pequot/Aguirre matter, Murray found that the record did not support any disciplinary or performance-action against SEC Enforcement Director Linda Chatman Thomsen or Robert Hanson.

Kotz stated in an interview prior to the ALJ’s rejection of his recommendations that things had not gotten “icy” in the SEC building his office shares with the Enforcement Division despite his critical reports. This latest development essentially tossing out his disciplinary recommendations against his SEC colleagues may drop the temperature down a few more degrees, however.

Following the judge’s ruling, Kotz stated:

“We are surprised and disappointed by administrative judge’s decisions. We believe her findings were flawed and not supported by the evidence. We also have serious concerns about the process utilized in arriving at these decisions,” Kotz said in a statement. “We stand by our comprehensive and thorough reports 100 percent.”

Sen. Charles Grassley, R-Iowa, whose Senate committee requested the investigations, also expressed frustration:

“It looks like the lawyers for the wrongdoers wrote the decisions. It’s hard to believe that after everything that’s happened over the last two years, the Securities and Exchange Commission is refusing to hold anyone accountable for the misconduct exposed by two independent inquiries,” Grassley said in a statement.

Frankly, it’s all starting to remind me a bit of the cartoon below, with the IG being Sam the Sheepdog and the Enforcement Division being Ralph Wolf.  They head into the building together, grab some coffee and chat about the Redskins as they head to their offices.  Then they battle each other all day, every day, until the whistle blows and they carpool home together.