Thursday, November 21, 2013

U.S. Attorney Arrests SEC Examiner: Sending the Wrong Message

U.S. Attorney Arrests SEC Examiner:  Sending the Wrong Message

What Steven Gilchrist did is wrong.  Mr. Gilchrist is a compliance examiner for the SEC.  He failed to sell holdings in the securities of six companies regulated by the SEC after the SEC enacted rules prohibiting such holdings.  He also transferred some of the holdings into a joint account with his mother, misstated his holdings on SEC disclosure forms, and purchased 100 shares of JP Morgan without appropriate approval.  If these allegations are true, he deserves to be fired.
The Boss's View (1999)
The U.S. Attorney in Manhattan had Mr. Gilchrist arrested and charged him with three counts of filing false statements.  The maximum penalty is fifteen years in jail.  According to The Wall Street Journal, the arrest is part of an ongoing investigation into the personal holdings of SEC personnel.[1]  In reading multiple accounts of Mr. Gilchrist’s arrest, I have not seen any allegation that he engaged in insider trading or other violations of the securities law.  Instead, Mr. Gilchrist deliberately ignored his agency’s rules.  Clearly, this is a serious violation for anyone in a position of enforcing securities laws.

Neither The New York Times[2] nor The Wall Street Journal mentioned that Mr. Gilchrist made efforts to get a waiver from the new rules.  It appears that these stocks had been long-term holdings, and some of the stock had been inherited.  Mr. Gilchrist sought waivers allowed under the rules. However, the SEC’s Ethics Office denied his requests, which was certainly within its rights.  Thus we have an employee trying to grapple with new rules, much as politicians try to deal with ethics rules when they run for office or serve in government. Unfortunately, when the SEC denied his requests, Mr. Gilchrist ignored their advice to divest and then lied about it on his disclosure forms.  These details are found in the criminal complaint.[3]

The U.S. Attorney, Preet Bharara, in filing the criminal complaint commented that it is important for enforcement officials to avoid even the appearance of impropriety.  Although I agree with Mr. Bharara’s statement, I’m having some trouble with the decision to press criminal charges.   While Mr. Gilchrist has been charged with violating disclosure rules, some of our Congressmen routinely trade their investment accounts in ways that go far beyond the mere appearance of impropriety. 

The district attorney thinks he is sending a stern warning to regulatory officials that they’d better comply with all aspects of the government’s ethics and disclosure rules.  I think the prosecutor is sending a different message.  Once again, the Department of Justice is going after a little guy, someone who will not be able to “lawyer up” like investment bankers and money management executives. 

While this may be an easy case to make, it sends a message that there is two-tier system of justice.  The people at the heart of the credit crisis who surrounded themselves with legal advisors may face civil penalties and diminished bonuses, but they haven’t been charged, arrested, or tried.  Rank and file employees, including compliance examiners, are easy targets. It might be tough to convict a Wall Street CEO, but it would be worth trying because it would send a message.  That message is a lot more important than arresting an SEC compliance officer for fudging his forms.


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