SEC Inspector General: Bullying or Accountability?

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6/13:  After Kotz left the agency, the SEC  brought in  David Williams, the inspector general of the U.S. Postal Service, who concluded that  Kotz violated ethics rules by overseeing probes that involved people with whom Kotz had personal relationships.

[On 1/17/12, embattled SEC Inspector General H. David Kotz announced he would be leaving the SEC at the end of the month. As the following article recounts, Kotz was criticized after he followed the mandate of his job and investigated high-ranking SEC officials, who didn't appreciate the attention. Is the timing of his departure coincidental?  Kotz  will become the managing director of the Washington office of Gryphon Strategies, an investigation firm. PGB]

A Rein of Terror at the SEC?

U.S. Securities and Exchange Commission Inspector General H. David Kotz has come under increasing fire from within the agency for allegedly instilling a climate of fear among employees in the organization.

Of course, Kotz won no friends when he blasted the SEC for missing the Bernard Madoff fraud, cast a spotlight on employees who viewed online pornography, and called for a criminal probe into the ethics of the SEC’s former top lawyer. In his latest 220-page semi-annual report to Congress, Kotz questioned the SEC’s decision to lease vastly more office space than the agency needs.

Is Kotz a bully or is he simply demanding accountability?

It is Kotz’ job as the SEC’s internal watchdog to investigate and report upon ethical and legal violations by SEC employees.

However, at least two SEC employees who were targeted for investigation by Kotz have filed formal complaints against him.

One complaint was filed by Nancy McGinley, an enforcement attorney at the SEC whom Kotz investigated in 2009 for allegedly using confidential information before trading in shares of Citigroup. Federal prosecutors declined to act on a criminal referral sent to them by Kotz with respect to McGinley’s trading.  However, the feds refusal to prosecute may simply reflect an assessment of competing priorities and limited resources.

McGinley’s complaint states that Kotz’s tactics “have caused SEC employees to fear the OIG’s false allegations and retaliations.”

In a recent email obtained by Bloomberg News, former SEC Chairman Harvey Pitt, who has represented several people involved in Kotz’s investigations, wrote:  “For those who may be unaware of what is going on at the SEC, there is a reign of terror in effect.”

Pitt is an advocate, representing paying clients, and he is probably no fan of Kotz anyway. Kotz uncovered embarrassing documents showing what some might call a too cozy relationship between the SEC under Pitt’s leadership and King-of-all-Ponzi schemes, Bernie Madoff.

Yet, many observers say Kotz is investigating alleged employee lapses that fall below the radar screens of his counterparts at other regulatory agencies.  But what kind of fraud and waste is too little for notice?

For example, Kotz apparently undertook an exhaustive investigation of a “senior officer” who was found to have used two weeks of sick leave rather than annual leave to go on vacation Hawaii.

According to the Blog of the Legal Times, Kotz contacted several airlines, then “issued a subpoena to an airline for the senior officer’s airline tickets and related reservation information.” The IG determined she flew to Hawaii on May 8, 2011, and returned on May 19, 2011, when she was supposedly out sick. Kotz recommended disciplinary action up to dismissal, but the employee already announced she was resigning from the SEC in August 2011. The 80 hours of vacation, however, were counted as annual leave, not sick time.

Kotz’ actions do not appear to fit within any definition of workplace abuse in that he appears to be acting in good faith and within the parameters of his job to root out corruption, fraud, and waste at the SEC.  Plus, there is an inherent vulnerability attached to Kotz’ position. Senior officials and other powerful interests within the agency don’t like being investigated or even second-guessed.

Is he using a hammer to smash an ant?  It depends on your perspective. Quite understandably, few taxpayers would defend a government employee who uses sick leave to vacation in Hawaii so that she can use vacation time for more vacation time.

Millions of Americans have no vacation time, in that they are unemployed.

In the final analysis, one also might observe that there is an irony here. It would have been nice if the SEC had acted as aggressively as Kotz is accused of acting to do its job to protect the American public from the financial fraud, swindles and outright hucksterism that has contributed to the worst depression in modern history.