SEC Branch Chief Violates Agency’s Code of Ethics 14:41, May 18, 2017

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SEC Branch Chief Violates Agency’s Code of Ethics

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Having a written code of conduct (sometimes also called a “code of ethics”) is important — but it’s at least as important that you effectively develop and implement your code of conduct. When employees transgress it, employers need to take swift and appropriate action to remedy the situation. This is especially true of conflicts of interest situations, which my colleague Douglas Kelly aptly observes are “not as sexy as insider trading, popular as bribery, or diabolical as fraud,” but nevertheless have the power to “erode a company’s compliance program.” Fraud and ethics violations by a manager at a government agency charged with stopping fraud illustrate that even the most stringent controls need adequate enforcement to prevent workers — especially long-term workers who know their way “around” their employer’s systems and internal policies — from taking advantage of their know-how and trust.

Breaking Bad & Hiding the Mess

David Humphrey was a branch chief for the Securities and Exchange Commission (SEC) in Washington, D.C. He had worked for the SEC for 16 years and been a branch chief in the Division of Corporation Finance for 10. With all that experience, he probably knew the employee code of ethics pretty well — well enough to find ways around it. He certainly knew (because he admitted as part of a criminal guilty plea) that the SEC’s internal ethics regulations barred him from trading options in securities issued by companies the SEC directly regulates, and that he was required to disclose any prohibited option trades and certify that he was in compliance with the SEC’s ethics regulations. But Humphrey did trade prohibited options, did not disclose that he had done so, and falsely certified that he hadn’t violated the ethics regulations.

We know this because Humphrey pleaded guilty to “making false statements in government filings in order to conceal his prohibited trading of options and other securities,” according to the Department of Justice. He will be sentenced in August of 2017. On the same day that Humphrey entered his guilty plea in a federal criminal court, the SEC announced that it had filed civil securities fraud charges against Humphrey based on many of the same facts. Humphrey settled with the SEC for more than $100,000 and agreed to a permanent ban from appearing or practicing as an accountant before the SEC.

The SEC Complaint says that “Humphrey 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.” The Complaint also alleges that Humphrey actively hid his illicit trades from the SEC Ethics Office, failed to seek pre-clearance for the trades, and that the disclosures he did make about his trades and securities holdings were false. He traded on options of companies the SEC directly regulates, including Citigroup and Under Armour, according to the Complaint.

Breaking Down the Significance

The facts behind the criminal plea deal and civil charges are significant because the SEC is charged with protecting investors and markets by enforcing the laws against securities fraud, including insider trading. Humphrey admitted that he had traded in options of securities his employer regulated. Doing so breached his duty of trust with the SEC and the markets. It created the possibility (or at least, appearance) that a regulatory agency held a stake in the very entities it regulated. In other words, this created a conflict of interest.

The SEC takes code of conduct violations seriously in companies under its jurisdiction. The agency has fined United Airlines’ parent company more than $2 million for failing to enforce the company’s own code of conduct in violation of the Securities Exchange Act. So it’s disconcerting that that the SEC did not stop (and presumably, did not even know about) Humphrey’s fraudulent activities for a significant time.

Humphrey had apparently been illicitly trading and covering his tracks for more than a decade before he was caught. We should not, therefore, be lulled into complacency by the notion that Humphrey eventually got his comeuppance. Humphrey admitted to a federal criminal court that he got away with wrongdoing, using his employer’s own computer during work-hours, more than 100 times over 13 years.

Paper Policies, Human Frailty

The lesson private employers can learn from this is that if something like this can go on under the SEC’s own nose, with its enforcement apparatus and mission to combat fraud, workers at firms focused on profit (not fraud enforcement) have even less reason to assume their workers abide by policies on paper. Employers need robust systems and processes in place to put their codes of ethics into practice.

Companies can do this by examining their policies, bolstering or building a compliance culture, and providing effective training to all employees on the company’s code of ethics and compliance mandates.

LawRoom (powered by EverFi) delivers online training to help your business meet compliance requirements both dynamically and scalably. In addition to our award-winning online courses, LawRoom delivers a robust, cloud-based learning management system to help you easily deploy and track our growing library of ethics, anti-harassment, data security and employee conduct courses.

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Steve Treagus
Stephen Treagus, JD's, previous practice as an attorney specializing in employment litigation exposed him to the rough-and-tumble world of employment relationships gone awry. Today, this experience informs his articles and courses, helping employers avoid costly litigation and get employment law right. Stephen earned his JD from John F. Kennedy University School of Law and his BA from Sonoma State University.

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