SEC aggressively investigates media leaks

The government agency sends a clear warning to any employee who speaks to a journalist: Shut up

If you think investigations of media leaks are confined to issues of national security, think again.

Since 2008, one particular federal government agency has aggressively investigated leaks to the media, examining some one million emails sent by nearly 300 members of its staff, interviewing some 100 of its own employees and trolling the phone records of scores more.  It’s not the CIA, the Department of Justice or the National Security Agency. 

It’s the Securities and Exchange Commission. 

Details of the SEC’s latest inquiry were recently revealed, when CNBC and Reuters reported that the agency’s Office of the Inspector General (OIG) had examined the email and phone records of 39 SEC employees. The goal: To find out who had leaked to Reuters information on the commission’s settlement with JP Morgan over the “London Whale” trading charges.

The March 2014 OIG report, which itself was leaked to the press, said investigators had also interviewed 53 SEC employees, including the chair, Mary Jo White, and the four other commissioners. They also reviewed the building logs to find out when Reuters reporters visited the SEC headquarters.

All that effort was for naught. Despite the time and resources that have been poured into them, none of the SEC’s eight investigations in the past six years have uncovered the leakers. (See the details in the table here.) Five years ago, OIG investigators tried to find the sources of a Wall Street Journal story on a leaked SEC report examining how ratings agencies failed to accurately assess the risks of mortgage-backed securities. They interviewed 37 employees and reviewed nearly 150,000 emails but failed to find their target.

The zealousness of these probes is worrisome. Leak investigations send a chilling message to both journalists and their sources. They can also impede legitimate newsgathering and curtail reporting that seeks to hold government to account. 

The SEC is a powerful agency with a big mandate that dates back to the stock market crash of 1929: To protect investors and maintain fair and functioning markets. That role has become even more important since the 2008 financial crisis.

The SEC is the enforcer of the law for the financial sector. Its success or failure in regulating companies and reining in the excesses of financial institutions are matters that concern not just the U.S. public but, given the global contagion that followed the collapse of Lehman Brothers in 2008, also the world.

More, not less, media scrutiny of the SEC would do us all some good. To some extent, our economy depends on how well the SEC does its job, the wisdom of its decisions and enforcement actions, and its ability to ensure that the 2008 disaster is not repeated.  The leaks provide public insight into how the SEC works, even if they do disclose information that may inconvenience the agency.

The SEC doesn’t share that view.  It argues that it needs to lay down the law and stanch the flow of leaks that might yield market-moving information. But even a cursory review of information “leaked” to the media suggests that the SEC only jumps on the trail when it suits the agency’s goals.

In just the past three months, many articles have been published that seem to rely on leaks similar to those that the OIG has so ardently probed. The stories include a Wall Street Journal report that revealed the SEC is investigating JP Morgan for steering its clients to its own investment products and away from those offered by outside firms, as well as a Reuters story on an SEC inquiry into whether brokerage houses are providing their clients the best price and most efficient execution of their trades. The source for the stories? “People close to the probe” and “several people familiar with the matter.”

There seems to be a double standard: Inconvenient leaks are investigated; beneficial ones, tolerated. As a journalist who has followed the SEC for many years says, “It appears that the agency has a long history of leaking information of a self-serving nature, giving the appearance that it is doing its job investigating companies.”

At the heart of the most recent investigation was Sarah N. Lynch, a Washington, DC-based reporter for Reuters who was suspected of having received information that had not been authorized for disclosure.

[Disclosure: Lynch was my student at the Columbia Journalism School’s Stabile program in 2007-08 and my partner is a senior editor at Thomson-Reuters.] 

In September of last year, Reuters published two stories on what took place in an executive session at the SEC, when the commissioners were deciding on a settlement with JP Morgan.  While the SEC itself issued a press release about the settlement two days after the first Reuters report, that story and Lynch’s subsequent follow-up revealed more details, including that the commission was split, 2-1, in imposing the $920 million fine on JP Morgan.  Reuters also reported that two other commissioners had recused themselves; the lone holdout was a commissioner who favored penalties against bank executives over a fine against the company and its shareholders. 

JP Morgan was on the hook for concealing the losses racked up by one of its investment units. The bank was found to have fraudulently overvalued its investments to hide possibly as much as $9 billion in losses in trades on credit default swaps that took place in 2012.

It’s a story that is in many ways emblematic of the extreme risk-taking and weak internal controls in investment banks that have exacerbated the financial crisis.  The adequacy of government sanctions on erring companies and executives is therefore a story ripe for journalistic inquiry.

But the SEC didn’t think so. A staff member of the chair, Mary Jo White, brought the Reuters stories to the attention of the OIG, saying she was responding to a concern expressed by one of the commissioners.  Once a possible breach is brought to its attention, the OIG has to begin an investigation, according to spokesman Raphael A. Kozolchyk. 

The OIG probes have mainly been of inconvenient leaks, with many of them initiated because of complaints from SEC staff.  It’s interesting too that leak inquiries have ramped up since the 2008 crisis; only one such inquiry was conducted in 2000-2007, according to the reports the OIG submits to Congress.

Kozolchyk takes an absolutist view of leaks. “Reporters should not be getting access to information over and above what is released to the public and Congress.”

“JP Morgan was entering into settlement negotiations,” he added. “Two commissioners recused themselves. The comment of one commissioner on why he was voting against the settlement could affect JP Morgan’s share prices.”

The truth is that all sorts of information ­– even weather forecasts or predictions of political upheaval ­– can affect share prices. Ultimately, the public interest in the information should be weighed against the possible harm that would be caused by the release of tradable information.

What Reuters revealed were internal SEC deliberations on what is arguably one of the biggest issues of our time: How should big banks and companies be penalized for the wrongdoing they commit?

Kozolchyk doesn’t see it that way. “Reuters is interested in exclusives. They are interested in beating competitors, not educating the public,” he said. “I think Reuters is going to have a hard time getting interviews now particularly as they’re not seen as a trustworthy entity.”

In 2012, Reuters published several stories by Lynch about how SEC staffers failed to encrypt computers that contained sensitive information on how to hack into stock exchanges. One story quoted unnamed sources and another was based on an unredacted SEC report on the problem. That leak was also investigated by the OIG, which went through staff emails and interviewed employees but failed to identify Lynch’s sources.

The investigation of the JP Morgan leak, however, was far more thorough. Through phone records, the OIG found that Lynch had spoken to an SEC Commissioner and three SEC employees. She also exchanged email with an SEC commissioner and with the counsel of another commissioner. 

It must have been unnerving for the SEC staff to be asked exactly what they had told Lynch, to provide detailed information about their conversations and email exchanges with her and whether they had given her any documents. The investigators’ interview with Tyler Gellasch, then the legal counsel of one of the SEC commissioners, provides a particularly unsettling example of overzealous interrogation. 

It sends a clear warning to any government employee who speaks to a journalist. The message is loud and clear: Shut up.

Probers grilled Gellasch about the questions Lynch had asked him and what his responses were. Gellasch, who has since resigned and joined the staff of the Senate subcommittee on investigations, told them he had the impression that she already knew about the split vote and that, while he didn’t intend to do so, he may have unwittingly confirmed that fact. A conservative news site reported last week week that Gellasch’s departure from the SEC may have been prompted by the investigation.

The SEC doesn’t seem to have a full appreciation of what it is journalists do.  Reporters piece together information from interviews like the one described above. They leverage information from one source to get additional information from another. These are time-honored newsgathering practices.  This is our stock in trade: We extract and piece together bits of information from disparate and multiple sources.

And the public ultimately benefits, resulting in better and more informed insights into the workings of government.

Leak investigations threaten to put a stop to all that.

Sheila S. Coronel is Dean of Academic Affairs at the Columbia Journalism School and director of the Stabile Center for Investigative Journalism.