SEC investigated its own 'London Whale' leak

Beached Whale

The SEC conducted a dragnet to determine who in the agency allegedly leaked information about a JP Morgan "London Whale" settlement, CNBC has learned.

The inspector general of the Securities and Exchange Commission conducted an intensive, months-long dragnet in 2013 and 2014 involving phone, email and security searches to determine who inside the agency allegedly leaked information to the media about a closed commission meeting discussing the massive JPMorgan "London Whale" settlement, CNBC has learned.

Investigators at the Office of the Inspector General produced a 16-page report detailing their findings in March, but that report has never been made public. A copy of the report was obtained by CNBC on Thursday.

The document paints a picture of an SEC in which commission members are at odds with one another and investigators scrutinize their colleagues, staff and the media. It also details just how far the inspector general went to learn how information about a Sept. 12, 2013, executive session commission meeting about JPMorgan had apparently been given to a Reuters reporter, Sarah Lynch.

The wide-ranging hunt for the apparent leaker went all the way to the top: The inspector general's report says investigators interviewed SEC Chair Mary Jo White , the SEC commissioners, five employees of the Office of the Chair and 18 employees of the Offices of the Commissioners. In their report, investigators said they searched the emails and BlackBerry records of 39 SEC employees and conducted interviews with 53 SEC employees in total. Details in this article are drawn from the inspector general's report.

Investigators "manually reviewed" each of the SEC employees' office telephone records and "confirmed whether the employees had deleted any records from their telephones," the report said. And the inspector general's staff scrutinized SEC headquarters visitor logs to determine when Lynch and a number of her Reuters colleagues had entered the building during September and October 2013.

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For all that, the report said, investigators came up empty: "The OIG [Office of Inspector general] was unable to conclude which specific individual or individuals had improperly disclosed information from the September 12, 2013 Commission Meeting," the report said. "However, the OIG determined that a Commissioner and two SEC staff members had spoken to Lynch and one SEC staff member had spoken to Reuters reporter Emily Flitter around the time that the information was improperly disclosed. The OIG also found that one of those employees may have confirmed certain information."

At issue was a 16-minute executive session of the commission on Sept.12, 2013, to approve the agency's portion of JPMorgan's massive $920 billion settlement in that firm's so-called "London Whale" trading fiasco. The SEC's decision, and the slim voting margin by which it passed, were not made public until Sept. 19.

But on Sept. 17, Reuters reported that the SEC had approved its portion of the settlement the previous week, in a "split vote."

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That was accurate, and previously not public, information, the IG report said. In the secret session, the IG report said, White and Commissioner Daniel Gallagher recused themselves. Commissioners Luis Aguilar and Kara Stein approved the matter, and Commissioner Michael Piwowar disapproved. Reuters later reported Piwowar voiced concerns "that the SEC was fining the company, as opposed to considering ways to levy penalties against top-level executives at the bank." That made the final vote on the settlement a slim 2-1 margin.

On Sept. 17, the report said, Piwowar's counsel received a call from Lynch. The counsel said the Reuters reporter conveyed "precisely" what Piwowar said during the closed session. The counsel decided there had been a leak from the executive session and shortly after that Piwowar went to White with a complaint about a leak. On Sept. 18, inspector general investigators were informed of the alleged leak, and they began their investigation. That months-long investigation resulted in the 16-page report dated March 5, 2014.

Investigators noted in their report that they requested an interview with Lynch and other Reuters reporters about the alleged leak, but they declined.

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The SEC IG and representatives of the SEC and Reuters did not immediately respond to requests for comment.

The SEC report noted that there was some confusion about which employees exactly were allowed to attend the secret Sept. 12 executive session vote. And the report noted that "it is possible for people standing outside the closed commission meeting room to hear the discussions and votes through the closed doors."

-By CNBC's Eamon Javers

CORRECTION: This version corrected which commissioners approved the matter.

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