Brad Barber, a finance professor at the University of California-Davis School of Management, cautioned that the study was in preliminary form and hadn’t yet been through the academic review process.
“It nonetheless raises interesting questions if proven to be accurate,” Barber said.
Beginning in August 2010, the SEC’s ethics rules prohibited employees from buying or selling shares of companies under investigation and generally required them to obtain permission before trading. The rules forbid them from trading in any financial company directly regulated by the SEC, such as a bank- owned broker-dealer. The rules also generally require workers to hold any stock they buy while working at the SEC for six months before selling the shares.
Enforcement Actions
The agency said in January it is reviewing the holdings of about 3,400 employees after some of its New York staff was found to own securities prohibited by ethics rules.
The trades involving the five companies were one part of Rajgopal’s and White’s study. According to the data, SEC employees made 87 trades in shares of JPMorgan, General Electric, Bank of America Corp., Citigroup Inc. and Johnson & Johnson in the 90 days before the SEC announced the companies had paid to settle enforcement claims.
In the case of Bank of America, for example, the researchers examined trades in the three months before the firm agreed to pay $150 million on Feb. 4, 2010 to settle claims it misled shareholders about bonuses and losses while acquiring Merrill Lynch & Co.
In the month before the cases became public, more than 70 percent of the employee trades were sell orders. Buy and sell orders from all investors in those companies were evenly divided in those time periods, the researchers found.
Beating Market
Some of the employees’ sales could have been motivated by a need to comply with the ethics rules on prohibited stocks, Rajgopal said. “But if that is the case, you still have to wonder about the timing,” he said.