An Inconvenient SEC Investigation for Speaker Boehner
When division directors from the SEC appear March 10 before the House Financial Services Committee, here’s a question unlikely to come from any Republican member: “With less funding, would the SEC have been able to crack the insider trading case involving a board director at Procter & Gamble?”
One reason why that’s an unlikely question is that Procter & Gamble is a major employer in the 8th congressional district of Ohio, represented by one John Boehner. That’s Speaker of the House John Boehner. Procter & Gamble reliably contributes to Mr. Boehner’s reelection campaigns.
Speaker Boehner can’t be happy about a messy federal investigation where the SEC will attempt to show that a leader of the venerable Procter & Gamble was stealing from shareholders.
Rajat K. Gupta served as a board director of P&G since 2007. He also served on the board’s audit committee, affording him access to the company’s financial figures. The SEC states that “Gupta disclosed to [Galleon hedge fund trader Raj] Rajaratnam material nonpublic information concerning Procter & Gamble’s financial results for the quarter ending December 2008. Rajaratnam relayed this information to others at Galleon, who caused Galleon funds to trade based on the information, generating illicit profits of over $570,000.” That’s not good press.
According to the SEC’s document,
At 9:00 a.m. on January 29, 2009,. Procter & Gamble’s Audit Committee, of which Gupta was a member, met telephonically to discuss the planned release. . A draft of the earnings release, which had been mailed to Gupta ., stated, among other things, that the company expected sales compared negatively . to the 4-6% growth the company had previously publicly predicted. Gupta called Rajaratnam in the early afternoon on January 29, 2009.. In the late afternoon of January 29, 2009, Galleon funds sold short approximately 180,000 Procter & Gamble shares. . By virtue of their trades, which were based on the material nonpublic information that Gupta provided to Rajaratnam, the Galleon funds generated illicit profits of over $570,000.
Illegal insider trading is a devilish crime, because the victims hardly know they’ve been pickpocketed; they’re simply on the other side of a trade unwitting to their inferior knowledge. As unwitting victims, they don’t complain to the police. The SEC must find other sources, such as complex computer algorithms that check for unusual trading. SEC Chair Shapiro, however, laments her agency’s information resources. “Our market analysts continue to use decades-old technology to recreate market events or to monitor trading that occurs at the speed of light.”
The complexity of proving an insider trading case underscores the need for adequate funding for the SEC.
The 1,200 enforcement staff at the SEC oversee some 6,500 publicly traded companies such as P&G. Each of these companies may have 10 board members. That’s 65,000 directors the SEC must monitor to make sure they don’t leak information as Mr. Gupta allegedly did. That’s on top of the dozens of other insiders at P&G and other companies. And policing insider trading constitutes only a fraction of SEC responsibilities.
However, as with many agencies this year, instead of increasing the SEC’s budget, Speaker Boehner intends to slash it. Public Citizen asked Procter & Gamble what they think of the Speaker’s proposed cuts in the SEC budget. P&G has yet to respond.
Speaker Boehner has clearly sided with Wall Street over the Wall Street reformers. In 2010, when staffers from Congress and regulators worked on reform legislation, Boehner spoke before the American Bankers Association and enjoined the audience: “Don’t let those little punk staffers take advantage of you, and stand up for yourselves.”
Our view is that insider traders are perfectly capable of standing up for themselves without Speaker Boehner’s help evading the SEC. Let’s give the SEC needed resources to accomplish their mandate and combat market thieves.
Bartlett Naylor is Financial Policy Advocate for Public Citizen’s Congress Watch