Written by CBS News investigative producer Laura Strickler and chief investigative correspondent Armen Keteyian.
CBS News has learned that two attorneys at the Securities and Exchange Commission (SEC) are under "active" criminal investigation by the FBI for trading stocks based on inside information.
Accusations against the two lawyers - a man and a woman whose names have not been released - are detailed in a report by the SEC inspector general obtained exclusively by CBS News.
The report, based on a review and analysis of "more than two years of e-mail and brokerage records," puts increased pressure on a commission that has come under fire lately for failing to detect the $60 billion Bernard L. Madoff Ponzi scheme, and turning a blind eye to the Wall Street financial crisis.
"We ought to be outraged if there is one insider trading information that's leading to personal profit," Sen. Charles Grassley, R-Iowa, the ranking member of the Senate Finance Committee, told CBS News.
In response to the IG report, Grassley sent a letter to SEC Chairman Mary Schapiro expressing that outrage and requesting detailed information about the stock holdings and trading practices of all SEC employees.
"It's hard to imagine a more serious violation of the public trust than for the agency responsible for protecting investors to allow its employees to profit from non-public information about its enforcement activities," Grassley said in his letter to Schapiro.
According to the report, the male attorney under investigation by the FBI works in the Office of the SEC's Chief Counsel and "has access to a tremendous amount of nonpublic information."
In another possible violation, the male attorney was found to have sent e-mails from his SEC account to his brother and sister-in-law "recommending particular stocks." The attorney's stock portfolio was estimated at one point to be valued at $200,000.
As for the female attorney, the report states that "two months before an investigation of a large health care company was opened" she "sold all of her shares of stock in the company." And "two days before an inquiry was opened" by a colleague who "occupies the office next to her" the female attorney sold stock in an oil company. Investigators say the female attorney traded stocks 247 times between January 2006 and January 2008. At one point her stock portfolio was valued as high as $170,000.
In addition, the report says that the female attorney "spent much of her work day e-mailing and searching the Internet about stocks." It quotes her telling investigators: "It's my main hobby. It's my passion." And: "It's my way of keeping intellectually above what other people are doing."
While the woman told investigators she did not check the SEC database - known as EDGAR - for information related to her personal stock trades, the inspector general said computer records reveal that she did, in fact, check the database on at least four separate occasions. According to the Inspector General, SEC employees are prohibited from accessing EDGAR for personal trading purposes.
Said Grassley, "Isn't it odd that you've got people in the prosecuting department that are trying to profit from information that they get from it. Their job is to be prosecuting and not profiteering."
According to employee interviews with investigators and SEC e-mails, the two colleagues shared many of the same stocks, frequently discussed their trades via e-mail, and regularly talked about SEC investigations and their own stock trading during weekly lunches.
In one instance, a third SEC employee told investigators the two attorneys under investigation encouraged her to buy stock in a company - despite knowledge of multiple ongoing investigations into that company, a violation of SEC rules.
Inspector General David Kotz, who uncovered the possible insider trading, declined a formal request for an interview, citing the ongoing investigation. But when we caught up with him near his office Kotz told CBS News, "The report talks about our concerns that there is no true compliance system at the SEC."
Both attorneys - who deny any wrongdoing - still work at the SEC and make six-figure salaries. The investigation was triggered after the high volume of trades by the female attorney set off alarms inside the agency.
As it now stands, there's no telling how many other employees are not reporting their trades because the SEC has no compliance system in place to monitor the trades of their employees. In fact, the two attorneys under investigation say that no one at the SEC had ever before questioned their reported securities holdings or transactions in the decades they have worked at the commission.
In an e-mailed statement to CBS News, the SEC said, "We take seriously even the suggestion that any SEC employee would engage in insider trading. We note that the IG's report neither accuses any SEC employee of insider trading nor concludes that any such conduct took place."
The statement went on to say, "Even so, we have been taking additional steps to enhance our protections against the potential for improper conduct. Those include developing a new computer system to facilitate reporting and review of securities trading by all SEC personnel; hiring a chief compliance officer; and providing greater clarity of our rule governing the reporting of trades."