Looks like the SEC is once again fixing to do what it does best. And that’s not policing our capital markets and protecting investors. It’s explaining to the world how (fill in the blank) could possibly have happened. (First, though, it will need to get around to admitting to itself that it has actually happened.)

Federal prosecutors and the FBI have been investigating possible illegal insider trading by two Securities and Exchange Commission enforcement attorneys who were in a position to receive sensitive information about agency probes of public companies.

The SEC’s inspector general, David Kotz, found that the frequent stock trades over a two-year period by the pair raised suspicions of insider trading. Earlier this year, he referred the matter to the Fraud and Public Corruption Section of the U.S. attorney’s office in Washington.

That office, together with the FBI, “is conducting an investigation of possible criminal and civil violations,” Kotz told SEC Chairman Mary Schapiro in a memo dated March 3.
[...]
Kotz’s report also found that the SEC “has essentially no compliance system in place to ensure that . . . employees, with the tremendous amount of nonpublic information they have at their disposal, do not engage in insider trading themselves.” The agency’s disclosure and compliance requirements are based on the honor system and there is no way to determine whether an employee fails to report a transaction.

Forget all the fancy technical stuff about market trading that the SEC was alleged to be clueless about in the wake of the Madoff scandal. They don’t even understand time-honored homilies about charity beginning at home. The honor system, for crying out loud!

The SEC’s official response? Roughly what you might expect, if you have as high an opinion of the agency as I do:

“We take seriously even the suggestion that any SEC employee would engage in insider trading,” a statement from the agency said.

Fortunately, no such suggestion has actually been made by anyone yet, as far as the SEC is concerned, so the SEC doesn’t yet need to put on their serious face:

“We note that the [inspector general's] report neither accuses any SEC employee of insider trading nor concludes that any such conduct took place.”

Just to be clear about how deeply the SEC has its institutional head up its institutional rear end, the inspector general’s report has some pretty specific allegations:

For example, they both traded in the stock of a large financial company after being told by a colleague about investigations of the company, a violation of SEC rules, according to the report.

According to the SEC, that does not represent accusing any SEC employee of insider trading.

Maybe the core guiding principle of the SEC these days is that there’s a sucker born every minute?