SEC Found Lax in Probe of Suspicious Foreign Trades

Associated Press

The Securities and Exchange Commission has failed to investigate most reports of suspicious foreign trading of U.S. securities, despite a growing number of illegal trades originating from abroad, a House panel said today.

A report by the Government Operations Committee said the SEC had actively investigated only 61 of 229 reports from stock exchanges of suspicious foreign trades--mostly those appearing to involve insider trading--in 1986 and 1987.

The report was based on a yearlong investigation by the panel’s subcommittee on commerce, consumer and monetary affairs.

The 168 incidents not investigated by the SEC, the subcommittee said, involved 503 foreign individuals, banks or other entities in 25 countries and represented gross potential profits for the foreign investors of at least $38.1 million.


“When fraudulent trading from abroad is not comprehensively investigated and prosecuted, the integrity of U.S. equity markets is threatened, all investors are put at risk and a tougher standard of prosecution for domestic traders is created,” the House report said.

The director of the SEC’s enforcement division, Gary G. Lynch, said today that he had not seen the report’s final draft, but that in testimony before the panel last June the SEC had taken issue with the way the inquiry was being conducted.

Methodology Challenged

“We at that time pointed out the problems we saw in the methodology that they employed,” he said.


Lynch said that the House subcommittee investigators had under reported the number of SEC staffers working on cases involving foreign purchases and sales of U.S. securities, and that the report was based on an incorrect assumption that all trading activity brought to the SEC’s attention automatically warranted a federal investigation.

Lynch said many trades--by domestic and foreign investors alike--are reported to the SEC as “suspicious” because they are executed near the time of a major price move on a securities exchange. Most of these trades, he said, are legitimate.

The report blamed the SEC’s failure to investigate more suspicious foreign trades on a shortage of enforcement staff, a lack of bilateral agreements with other countries to share information on securities trades, the existence of bank secrecy laws in many countries and delays by the stock exchanges in reporting suspicious trades to the SEC.