Report: SEC Lawyer Wrecked Insider-Trading Case

Dec 1 2011 | 10:24am ET

The Securities and Exchange Commission's top internal watchdog has again rapped the agency for botching an investigation into a hedge fund.

SEC Inspector General H. David Kotz's semiannual report to Congress notes that the regulator was forced to abandon an insider-trading probe into a hedge fund manager because a top lawyer at the agency had inappropriate contacts with the manager. Neither the supervisory attorney nor the hedge fund is identified.

According to Kotz, the SEC's enforcement division began looking into the manager's 2006 purchase of a "natural-resource" company's securities and latter bid to purchase all of its outstanding stock. But the supervisory attorney told the manager that his actions were legal, and suggested that the manager call him on his cellphone, where he might "feel freer" to discuss matters.

The actions "created a cloud of suspicion as to the SEC attorney's intentions," Kotz wrote, and that the communications could have been used in the manager's defense should the SEC have brought an action against him.

Kotz wrote that he recommended disciplinary action, including possible firing, in August, but that as of last month the SEC had not taken action.

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