US SEC employee misled fellow investors

WASHINGTON (Reuters) – A U.S. Securities and Exchange Commission employee invested in a company accused of preying on deaf people and misled fellow investors into thinking their money was safe despite an SEC probe.

SEC Inspector General David Kotz recommended disciplinary action, including possible dismissal of the employee, according to a roundup of his recent and pending investigations sent to Congress Tuesday.

Asked whether the employee had been disciplined, SEC spokesman John Nester said, “appropriate action was taken.” Kotz’s semiannual report is just the latest embarrassment for the SEC to come from the internal watchdog. Last week he reported the SEC could owe millions of dollars after bungling a deal to lease 900,000 square feet of office space.

In the case of the investing staffer, 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 Oct. 6, 2010, the SEC filed emergency action in federal court against the company to get an asset freeze, and won a default judgment on Feb. 14, 2011.

Kotz’s 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.

Court records did not list the name or contact information of any attorney for the company, which was never registered to offer securities in the United States.

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.

In addition to recommending that the employee be disciplined and possibly fired. He also recommended that all the staff in the employee’s office be better trained to understand what constitutes nonpublic information.

His findings were issued in a March 31 report, but were first made public in the congressional report.

“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.”

Among other cases listed by Kotz Tuesday was a probe into a regional SEC staff attorney who disclosed the name of a confidential FBI informant to an investor and a witness.