SEC employee misled investors on fraud: watchdog

Reuters News
|
Posted: May 31, 2011 5:18 PM
SEC employee misled investors on fraud: watchdog

By Sarah N. Lynch

WASHINGTON (Reuters) - A Securities and Exchange Commission employee invested in a company that was the target of an SEC fraud investigation and misled fellow investors into thinking their money was safe, the agency's internal watchdog found.

SEC Inspector General David Kotz disclosed the findings of his investigation in his semiannual report to Congress on Tuesday.

According to the report, Kotz's office received a tip in February from a regional senior official who said a Washington, D.C.-based employee invested in an investment company that was the subject of an active investigation.

The tipster accused the employee of "providing false, misleading and nonpublic information" to other investors, telling them the company was legitimate and that they would "be receiving considerable sums of money from their investments."

On October 6, 2010, the SEC filed emergency action in federal court against the company to get an asset freeze, and won a default judgment on February 14, 2011.

The report did not mention the names of the employee or the company, but court records from these dates point to Imperia Invest IBC, an Internet-based investment company that allegedly targeted deaf investors and others by raising more $7 million from them without delivering a single payment.

A federal judge in Utah later ordered the firm to pay $15.2 million in disgorgement and prejudgment interest, although it is not expected to ever be collected after investors' funds were transferred electronically to overseas accounts.

Kotz said the SEC employee later admitted to communicating with investors and was placed on administrative leave after he was confronted by the regional senior official.

"The employee shared nonpublic, false and misleading information with investors," Kotz wrote. "His conduct not only confused certain investors and gave them a false sense of hope, but it also had the potential to adversely affect an ongoing enforcement investigation."

This is just one of a series of recent investigations by Kotz that led to some embarrassing findings for the agency. Most recently, Kotz released a report which found the SEC could owe millions of dollars after bungling a deal to lease 900,000 square feet of office space.

Kotz also disclosed the findings of other recently completed investigations.

Among them was a probe into a regional staff attorney who disclosed the name of a confidential FBI informant to an investor and a witness.

(Reporting by Sarah N. Lynch. Editing by Robert MacMillan)