Two U.S. Securities and Exchange Commission enforcement lawyers are under investigation by federal criminal authorities for allegedly using insider information to trade stocks, a report by the SEC's internal watchdog said.

The Federal Bureau of Investigation and U.S. Attorney's Office are conducting an investigation of possible criminal and civil violations, the SEC's inspector general David Kotz said in a March 3 letter to SEC Chairman Mary Schapiro.

Kotz's report said his investigation revealed suspicious activity, appearance of improprieties and evidence of possible trading on nonpublic information and/or potential insider trading on the part of two SEC enforcement lawyers.

The report redacts the names of the enforcement lawyers. Both the report and letter were made available on Friday.

The report alleges the two lawyers traded in stock of a large financial services company even though another SEC employee became aware of three separate enforcement investigations of that company. That employee told the two enforcement lawyers that she could not buy more stock in this company because she had become aware of these investigations.

But the two lawyers did trade in the financial services company and denied they heard about the investigations, the report alleges.

Kotz's report does not say whether the two lawyers profited from their trades. The report also alleges the two lawyers maintained separate folders entitled stocks in their e-mail accounts and that they often sent e-mails from their SEC account about stocks and their own transactions.

It is not clear whether this violates SEC rules.

One lawyer sent e-mails to his brother and sister-in-law from his SEC e-mail account during the work day recommending particular stocks and sometimes informing his relatives that the other lawyer had also recommended them, the report alleges.

Kotz's office, which is investigating how the SEC handled the Bernard Madoff case, obtained and reviewed more than two years of e-mail records of the two SEC lawyers and the enforcement staffer. His office also reviewed their personnel folders and conduct folders.

An SEC spokesman said: We note that the report neither accuses any SEC employee of insider trading nor concludes that any such conduct took place.

Kotz's report recommends the SEC immediately begin to institute steps to better monitor employee compliance, among other things.

The spokesman said when Schapiro arrived at the SEC she made it a priority to improve the agency's ethics and compliance programs around employee stock ownership.

(Reporting by Rachelle Younglai; Editing by Andre Grenon)

Insider trading