"Source's Cover Blown by SEC," the Wall Street Journal declared yesterday.

"SEC Did Not Blow Source's Cover," the SEC shot back today in a letter to the WSJ.

Who is right and what are the facts surrounding what the WSJ describes as a "gaffe" by the SEC that "inadvertently revealed" the identity of an SEC whistleblower? According to the WSJ, as part of an SEC investigation of Pipeline Trading Systems LLC, an SEC lawyer "showed an executive who was being questioned a notebook from the whistleblower filled with jottings about trades, calls and meetings." The executive recognized the handwriting as belonging to Peter Earle, a former employee and trader at a Pipeline affiliate who the executive had previously supervised. "Pete's the whistleblower," the executive later announced to his colleagues at Pipeline.

This account of the Pipeline investigation sparked a response from Sen. Charles Grassley, a consistent thorn in the SEC's side. Sen. Grassley wrote a letter to SEC Chairman Mary Schapiro stating that "[w]histleblowers are essential to root out fraud and malfeasance. I am concerned that the SEC may not be properly protecting the identity of whistleblowers and others who come to the SEC with information on securities law violations."

The SEC's own letter today, however, paints a different picture. According to George S. Canellos, Director of the SEC's New York Regional Office, the agency did not disclose Earle's identity and its "use of his notebooks in an investigative deposition was neither 'inadvertent' nor a 'breach' or 'gaffe.'"  Canellos wrote that using the notebooks was a deliberate decision that the SEC lawyer handling the deposition discussed in advance with his supervisor. 

Canellos added that:

it was already widely known among executives of Pipeline that Earle had approached the SEC after he was terminated; and

the SEC obtain notes not just from Earle but from six traders at the firm, and used other traders' notes along with those of Earle in the deposition. Cannelos asserted in the SEC's letter that "the use of these traders' notes—highly relevant evidence prepared in the ordinary course of their work at [Pipeline affiliate] Milstream—in no way revealed whether Earle or any other trader was or was not cooperating with the SEC."

The WSJ and the SEC accounts of what occurred are therefore at odds with each other, particularly on the issue of whether Pipeline executives already knew that Earle was a whistleblower. On the POGO blog today, Michael Smallberg notes that this is not the first time that an SEC attorney has supposedly blown the cover of a whistleblower during an investigation, however. As laid out in a 2009 report by the SEC's Office of Inspector General, an SEC attorney was found to have disclosed non-public information about a whistleblower (a compliance officer at JPMorgan Chase) to JPMorgan's counsel. which was used against the whistleblower in an action he had against the company.

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