5 Min Read
(Adds details on SEC's ethics compliance system, how it compares with FINRA's)
By Sarah N. Lynch
WASHINGTON, May 3 (Reuters) - A former accountant at the U.S. Securities and Exchange Commission (SEC) is expected to settle criminal and civil charges, after he was caught illegally trading options while working at the agency, according to sources familiar with the matter.
The charges against David Humphrey, a 16-year SEC veteran, represent a rare instance of the SEC taking enforcement action against one of its own employees.
The SEC has strict securities trading rules for its employees as many of them have access to highly sensitive, non-public and potentially market-moving information.
Humphrey was charged with one criminal count of making a false written statement, after repeatedly filing false government ethics forms that failed to disclose certain investments, according to a federal court filing.
Sources familiar with the case said he is expected to plead guilty to the criminal charge, and settle related civil SEC charges, after he was caught trading options - many on his SEC work computer - over more than a decade for himself, as well as for his mother and a friend.
He will also pay more than $100,000 in penalties and ill-gotten profits to settle the SEC's civil case, and will be barred from practicing as an accountant before the SEC, the sources added.
The sources provided the information about the pending cases to Reuters anonymously, because the SEC charges and the plea deal have not been made public.
An SEC spokesman did not comment on the pending case.
Humphrey, who resides in Arizona and is no longer employed at the SEC, referred questions about the case to his attorney Ken Lench of Kirkland & Ellis.
Lench declined to comment.
SEC employees are banned from holding stock in companies directly regulated by the SEC, such as banks, and they are also required to get clearance prior to trading. Trading in options, or other financial instruments that derive value from securities, is also banned for all SEC employees.
In this case, Humphrey is alleged to have not only traded options and failed to report them, but also failed to seek clearance before making trades, among other things.
The SEC has an electronic system in which employees must report and get pre-approval prior to trading. Additionally, employees also must provide copies of all their brokerage statements to the SEC's ethics office.
Wall Street's self-funded regulator, the Financial Industry Regulatory Authority (FINRA), takes things a step further by having brokerage firms directly send FINRA duplicate copies of its employees' account transactions.
Humphrey served from 2004-2014 as a middle-level manager at the SEC's Corporation Finance Division, according to the court filing. While employees there are likely to have access to material, non-public information, Humphrey is not expected to be accused of using any such information to inform his options trading strategy, the sources said.
His wife Marie Humphrey was also previously employed at the SEC, according to public records and people familiar with the matter.
While government ethics rules governing prohibited holdings generally apply to both spouses, his wife is not expected to be charged in the case or accused of any wrongdoing.
Reuters was unable to reach her for comment.
SEC staffers have been prosecuted for various ethics violations in the past, but it is not common.
In 2013, the SEC's inspector general and federal prosecutors in New York announced criminal charges against Steven Gilchrist, a former compliance examiner. He was accused of making false statements about stock holdings by telling the regulator he had divested his bank stocks, when in truth he transferred them to a joint account held with his mother.
He later reached a deferred prosecution agreement.
Another former SEC examiner, Eugenia Cantiello, also reached a deferred prosecution agreement in 2015 for making false statements about her and her husband's prohibited stock holdings.
However, in both cases, the SEC's enforcement staff did not bring parallel civil charges.
The SEC has brought civil charges against former SEC employees at least two other times, though in both cases the underlying conduct occurred after those staffers departed the federal government. (Reporting by Sarah N. Lynch; Editing by Carmel Crimmins and Lisa Shumaker)