The SEC has violated federal law by destroying the records of thousands of enforcement cases in which it decided not to file charges against or conduct full-blown investigations of Wall Street firms and others initially suspected of wrongdoing, a former agency official has alleged.
The purged records involve major firms such as Goldman Sachs, Citigroup, Bank of America, Morgan Stanley and hedge-fund manager SAC Capital, the former official claimed. At issue were suspicions of actions such as insider trading, financial fraud and market manipulation.
The allegations come at a time when the Securities and Exchange Commission faces criticism that it has pulled punches or missed warning signs in its policing of Wall Street.
A file closed in 2002 involved Lehman Brothers, the investment bank whose collapse fueled the financial meltdown of 2008, according to the former official. A file closed in 2009 involved suspected insider trading in securities related to American International Group, the insurance giant bailed out by the government at the height of the financial crisis, the former official wrote.
Others involved Bernard Madoff, whose multibillion-dollar Ponzi scheme the agency failed to stop despite repeated tips.
The allegations were leveled in a July letter to Sen. Charles E. Grassley (R-Iowa) from Gary J. Aguirre, a former SEC enforcement lawyer now representing a current SEC enforcement lawyer, Darcy Flynn.
Flynn last year began managing SEC enforcement records and became concerned that records that were supposed to be preserved under federal law were being purged as a matter of SEC policy, Aguirre wrote.
Flynn contacted the National Archives and Records Administration, which sent a letter to the SEC saying it appeared there had been “an unauthorized disposal of federal records,” Aguirre wrote.
Based on Flynn’s account, the SEC inspector general’s office has been investigating and plans to issue a report by the end of September, Inspector General H. David Kotz said.
From 1993 through July 2010, records of about 9,000 preliminary inquiries were destroyed, Aguirre wrote. The inquiries, a first step in the enforcement process, can lead to full-fledged SEC investigations or be dropped without further action. They are known as MUIs, or “matters under inquiry,” and are opened when the SEC has reason to suspect someone violated securities law.
According to Aguirre, an internal directive to SEC enforcement officials said: “After you have closed [an] MUI that has not become an investigation, you should dispose of any documents obtained in connection with the MUI.”
SEC spokesman John Nester confirmed that that was the agency’s policy, but he said it was changed last year. The agency now directs employees to retain or dispose of inquiry records in accordance with the agency’s records management policy, Nester said. He said he did not have that policy.
Aguirre said federal law required that documents typically generated in preliminary inquiries be kept for 25 years.
Nester said the retention requirements “pertain to documents that meet the definition of a record, not every document that comes into an agency’s possession in the course of its work.”
Another official said the matter could lead to criminal liability, according to Aguirre’s letter.
According to Aguirre, the SEC told the National Archives that the enforcement division was “not aware of any specific instances of the destruction of records from any other MUI (i.e., an MUI that was closed without a subsequent formal investigation), but we cannot say with certainty that no such documents have been destroyed over the past 17 years.”
Grassley, who released a copy of Aguirre’s letter Wednesday, called on the SEC to explain what happened.
Aguirre wrote that the issue has “far-reaching, troubling implications for the leadership of the agency which is supposed to protect the nation’s investors and its financial markets.”
His allegations were first reported Wednesday by Rolling Stone.
In contacting Congress on Flynn’s behalf, Aguirre invoked whistleblower protection and said he was concerned that the agency “was in the process of engaging in a reprisal” against Flynn.
Flynn is a 13-year veteran of the SEC’s enforcement division, where he has received favorable evaluations and raises, Aguirre wrote.
Aguirre is a former SEC whistle blower who accused the SEC of disregarding evidence of insider trading by a hedge fund and thwarting his investigation. He claimed that the SEC fired him when he pressed unsuccessfully to question a top Wall Street executive.
The hedge fund later settled insider-trading charges with the SEC, and the SEC paid Aguirre $755,000 to settle his claim that he was fired in retaliation for blowing the whistle.
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