Former SEC examiner sentenced in leak

A former SEC examiner will spend the next nine months under house arrest for sneaking into the Commission’s secret databases to sweeten his job prospects with a private equity advisor now at the center of $1.8 billion fraud cases.

Michael Cohn will also pay a $50,000 fine and spend a year under supervised release. But it’s a far cry from the decades in prison Cohn was facing when federal authorities indicted him on felony hacking and obstruction of justice charges in 2019. Authorities say he logged into four different Commission databases – including its whistleblower hotline and its Enforcement Division case files (called “The HUB”) – and leaked details of investigations to New York-based GPB Capital in a bid to become the firm’s chief compliance officer.

The combination punch of the covid-19 crisis and an appellate ruling in New York’s notorious “Cannibal Cop” case knocked prosecutors against the ropes, and Cohn walked away with a misdemeanor plea deal last fall.

‘Commission intends to continue’

Federal prosecutors in the Eastern District of New York have since indicted GPB and its principals – David Gentile, Jeff Lash and Jeff Schneider – on fraud charges, accusing them of running an elaborate Ponzi scheme/affinity fraud. Gentile’s lawyers have hinted that they may use Cohn as the bogeyman in their defense. They’re already painting him as a rogue SEC agent who illegally taped privileged discussions at the firm.

The SEC and several other states have all filed separate enforcement actions against GPB, Gentile, Lash and Schneider. Prosecutors have intervened and obtained a stay in the Commission’s lawsuit. But the Commission says it’s pursuing other defendants in a widening investigation.

“The stay of the above-captioned action should not prevent the Commission from continuing its investigation,” Commission senior counsel Kristin Pauley said in a March 18 letter to district judge Margo Brodie.

New glimpses

At his March 24 hearing, Cohn, 62, was facing up to six months behind bars. Prosecutors urged US district judge Gary Brown to give him the max. Cohn’s actions, they said, “violated the trust that the public places in government employees to live up to the legal and ethical standards imposed upon them.”

While the SEC’s investigation widens, authorities have offered further glimpses into its investigations. In a March 15 sentencing memo for Cohn, lead prosecutor Lauren Howard Elbert said the SEC examined GPB in early 2018, and the case was referred to the Enforcement Division later that year.

In September 2018, a corporate recruiter called Cohn – then a four-year veteran of the Enforcement Division – and told him there was an opening for a CCO at GPB. Fifteen minutes after hanging up with the headhunter, Cohn logged into the SEC’s secret databases. He had his first interview with GPB leaders on October 4, 2018, Elbert said.

By that point, federal authorities had turned an informant, and he was wearing a wire, Elbert said. The recording caught Cohn as he “intimated” to GPB’s leader “that he had inside information regarding the SEC’s investigation. Before and after he got the GPB job, Elbert claims, he slipped “confidential information” on the ongoing investigations. At least seven different conversations were taped but they are all redacted in Elbert’s letter.

Cohn’s last day at the Commission was October 12, 2018. At his exit interview with ethics counsel, Cohn hid his new job. He was warned, Elbert says, about federal laws that forbid former government staffers from taking jobs “that could involve the unfair use of influence and information gained through government employment.”

Whistleblower urges Reg D reforms

Months before Cohn’s plea deal, prosecutors identified Toni Caiazzo Neff – a former compliance officer at one of the broker-dealers that sold GPB – as one of the whistleblowers in the case. Now an independent compliance consultant, Caiazzo Neff said the GPB case doubly underlines the need for Reg D reform.

“Now is the time for a hard look at Reg D reform,” she told affiliate publication RCW. “It’s obvious that the secrecy behind them – and the fact that regulators can’t intervene proactively but have to wait until someone is actually hurt – is the wrong way to foster competitive, open markets.”

Caiazzo Neff said she also hopes the Commission will look within here.

“Never mind my case for a second,” she said. “I hope the SEC reviews and strengthens its own cybersecurity protocols and internal controls. What happened with Cohn could have a chilling effect on the willingness of whistleblowers to come forward.”

Gentile, Lash and Schneider are all free on bond. A trial date hasn’t been set.

This article first appeared in affiliate publication Regulatory Compliance Watch