Senior officers at the Securities and Exchange Commission’s (SEC) Fort Worth Regional Office (FWRO) took retaliatory action against two employees who were trying to get the agency to pursue more complex cases like the Stanford Ponzi scheme, according to a newly released (and heavily redacted) report by the SEC Office of Inspector General (OIG) obtained by POGO.
OIG Confirms Allegations of Retaliation
As reported by Zachary Goldfarb at The Washington Post, the OIG’s investigation uncovered a disturbing culture of retaliation at the FWRO, the same office that repeatedly failed to act on overwhelming evidence pointing to the Stanford Ponzi scheme.
At a meeting in August 2007, Kimberly Garber and Rose Romero—two senior officials at the FWRO—announced a new examination initiative known as the broker-dealer Risk Assessment Verification Examinations (RAVEs) program. In an apparent effort to boost the number of exams conducted by the FWRO, Garber and Romero proposed that SEC officials conduct a half-day examination of brokerage firms in which they would interview management and review company policies, but would not actually examine company records.
As soon as the new program was announced, Julie Preuitt, an FWRO assistant director, began raising concerns that the RAVEs would require examiners to focus too much of their attention on quick-hit, superficial examinations, diverting resources away from in-depth examinations of broker-dealers designed to uncover fraud like the $8 billion Stanford Ponzi scheme.
Prueitt told the OIG that Garber and Romero retaliated against her in a number of ways after she expressed her objection to the RAVEs program to officials in the FWRO and in Washington, DC. She claims she was excluded from the program, mistreated during meetings, issued a letter of reprimand that contained several inaccuracies, and involuntarily transferred to a non-supervisory position, among other things.
The OIG determined that Preuitt doesn’t technically qualify as a whistleblower because she didn’t make actionable disclosures to anyone beyond her supervisors, even though the Post reported that she contacted officials in Washington, DC to complain about the RAVEs. Nonetheless, the OIG concluded that many of the actions taken against her—including the letter of reprimand and the decision, on June 19, 2008, to transfer her to non-supervisory duties—were inappropriately based on the substance of her complaints (the Post points out that the SEC eventually validated Preuitt’s concerns by suspending the RAVEs program in favor of examinations that seek to verify a company’s assets and other more intensive examination efforts). The OIG also reported that “there was no evidence of any performance concerns expressed” prior to Preuitt voicing her objection to the RAVEs program. As a result, the OIG referred the matter to the agency for possible disciplinary action against the two senior officials.
During this time, Joel Sauer, an FWRO branch chief, had also been expressing his opposition to the RAVEs program to officials in the FWRO and in Washington, DC. A few days after Preuitt was removed from her position, Sauer sent a letter to then-Chairman Christopher Cox and Office of Compliance Inspections and Examinations (OCIE) Director Lori Richards alleging inappropriate retaliation against Preuitt, serious mismanagement of the FWRO examination program, and unethical conduct by Garber.
But the Post reports that SEC officials made the incredible decision to send Sauer’s letter back to the FWRO and ask Romero to handle it, even though she was one of the senior officials who had taken retaliatory actions against Preuitt.
POGO has learned that Sauer was previously awarded the SEC’s Examination Award of Excellence in recognition of his outstanding work. But a few weeks after he sent his letter to the DC officials, Sauer received a performance counseling memorandum, and senior officers started monitoring him daily to see how he was progressing on his assignments. Shortly thereafter, he received a letter of reprimand citing his “insubordinate and inappropriate behavior.”
The OIG confirmed that the counseling memorandum and daily monitoring both occurred shortly after Sauer sent his complaint to SEC senior management in Washington, DC. The OIG also found that Sauer’s letter of reprimand cited his disclosure to senior management in DC as part of his so-called “inappropriate conduct.” Shortly thereafter, Sauer left the agency.
The OIG determined that Sauer would clearly qualify as a whistleblower since he made “disclosures to authorities in a position to correct improper activity,” and concluded that there was an inappropriate connection between Sauer’s complaint and the subsequent retaliatory actions taken against him. The matter was referred to the agency for consideration of possible disciplinary action against Garber and Romero, the same two senior officers who retaliated against Preuitt.
Connection to the Stanford Ponzi Scheme
Preuitt, a longtime veteran of the SEC, was also named and referenced extensively in a separate OIG report on the inexcusable delays in the SEC’s investigation of the Stanford Ponzi scheme.
In 1997, Preuitt was working as a branch chief in the FWRO’s broker-dealer examination group. After reviewing Stanford’s annual audit, she uncovered a number of red flags suggesting that Stanford was possibly “stealing from investors.” Eight months after Preuitt and the examination staff passed along their report, the enforcement staff finally opened a matter under inquiry (MUI), which they closed a few months later after Stanford refused to comply with a voluntary request for documents.
Over the next few years, Preuitt and the FWRO examiners continued to uncover many of the same red flags when reviewing Stanford’s operations, but they couldn’t get the enforcement staff to aggressively pursue the case. One of the enforcement officials who rebuffed Preuitt was Spencer Barasch, who later left the SEC and tried to represent Stanford on three separate occasions.
In attempting to determine why the enforcement staff was so reluctant to pursue the case, the OIG pointed to “the difficulties in obtaining approval from the SEC staff in Washington, DC to pursue novel investigations; the pressure in the FWDO to bring a lot of cases; the preference for ‘quick hit’ cases as a result of that pressure; and the fact that Stanford was not a ‘quick hit’ case.”
It appears that the introduction of the RAVEs program was just the latest example of the FWRO’s cultural preference for these quick-hit, number-generating programs, even though this approach had severely hindered the office’s ability to crack down on the Stanford Ponzi scheme.
Once Again, SEC Refuses to Discipline Senior Officials
POGO has also been alerted to a number of troubling developments related to the SEC’s mishandling of the OIG’s FWRO investigation. For instance, we’ve obtained an email sent from Garber to the entire FWRO examination staff in which she is openly critical of staff making complaints to the OIG.
In addition, we’ve heard that the SEC conducted a review of the FWRO after the release of the OIG report, speaking with many staffers who voiced serious concerns about FWRO senior management. But even after this review, the agency still hasn’t taken any disciplinary action against the two senior officers cited in the OIG report. As the SEC drags its feet, it has forced Preuitt to sit in limbo with no significant staff, authority, or responsibilities, even though she continues to collect an assistant regional director’s salary.
Unfortunately, this is not the first time the SEC has refused to follow an OIG recommendation for disciplinary action. A report recently released by House Oversight and Government Reform Committee Ranking Member Darrell Issa (R-CA) made note of the fact that the SEC has repeatedly failed to implement reforms or hold wrongdoers accountable. The report mentioned an investigation by POGO which revealed that the SEC has failed to act on hundreds of recommendations made by the OIG in recent years.
Following up on that investigation, we’ve prepared a new document summarizing the agency’s response to reports in which the OIG specifically recommended disciplinary action. This information mostly comes from the OIG’s semiannual reports to Congress and documents obtained through the Freedom of Information Act (FOIA). As you can see, the SEC has taken little to no action on many of these recommendations, especially when the individual cited is a senior official.
There are a few cases in which the SEC claims that “final action has in fact occurred,” as indicated in the document. In a few of these cases, the “final action” occurred when an administrative law judge named Brenda Murray rejected the OIG’s findings and decided that no disciplinary action should be taken. In another case, the “final action” occurred when the enforcement attorney who was recommended for discipline resigned and announced he was running for Congress.
The Issa report also mentioned the fact that the SEC has declined to fire any of the employees who were caught over the past few years viewing pornography on agency computers. Senator Charles Grassley (R-IA) recently forwarded SEC Chair Mary Schapiro a letter from a whistleblower at the Los Angeles Regional Office (LARO) who explained that the failure to take disciplinary action has had serious negative consequences:
“Zzz’s continuing presence at the LARO, unpunished (after receiving a mere reprimand) and arrogant in his lack of contrition, creates an inherently hostile work environment for the entire LARO examination staff. Staff morale has never been so low, and turnover in the IA [Investment Adviser] exam staff, which has been a growing problem going all the way back to when Zzz was made a branch chief, is through the roof. It all underscores what is arguably an egregious failure to supervise by the LARO’s regional director.”
By failing to take disciplinary action against the two senior officers named in the OIG’s FWRO report, the SEC continues to broadcast the message that senior management will not be held personally accountable for misconduct, no matter how egregious.
SEC’s Refusal to Post OIG Reports Online
Even though the OIG issued its FWRO report back in September 2009, the report is only now being made available to the public.
Of course, the OIG had summarized its investigation in a previous semiannual report to Congress. But apparently the agency gets to decide which reports will actually be posted online, even in a redacted form.
This lack of public disclosure makes it exceedingly difficult for outside stakeholders to hold the SEC accountable. In POGO’s report on IG independence, we argued that “IGs must have absolute autonomy over their own websites, and must be required to post promptly all public reports in a form easily and directly accessible, printable, and downloadable.” In keeping with this recommendation, the IG Reform Act of 2008 states that each IG shall, “not later than 3 days after any report or audit (or portion of any report or audit) is made publicly available, post that report or audit (or portion of that report or audit) on the website of the Office of Inspector General.”
But since the SEC usually decides not to make OIG reports publicly available, it’s often up to outside groups such as POGO to go through the lengthy process of filing FOIA requests to obtain the reports. And the SEC’s FOIA record is nothing to brag about—in fact, a recent OIG audit revealed that the SEC’s overall FOIA disposition rate is “significantly lower when compared to all other federal agencies” (emphasis added).
SEC’s Mistreatment of Whistleblowers
It’s well known by now that the SEC has an unfortunate track record of mishandling complaints from outside whistleblowers on issues ranging from credit rating agency misconduct to the Stanford and Madoff Ponzi schemes. But the OIG FWRO report makes it clear that the SEC also has a problem with handling tips from its own employees. The release of the FWRO report comes on the heels of the SEC’s settlement with Pequot Capital Management, in a case that also involved retaliation, this time against an SEC attorney who was aggressively pursuing an insider trading investigation (more on this to come).
As far as handling outside whistleblowers is concerned, SEC officials say they are revamping their intake system for tips and complaints. Meanwhile, Congress has begun the process of reconciling legislation to reform the financial regulatory system, which includes provisions to improve the SEC’s operations by offering greater rewards and protections to outside whistleblowers from the financial services industry.
But given the SEC’s mistreatment of whistleblowers within its own agency, as illustrated by the FWRO report, it’s easy to see why many outsiders have thus far been reluctant to come forward with tips on fraud and misconduct. In order to address the systemic management problems that have been repeatedly uncovered by the OIG’s investigations, Congress must continue to conduct aggressive and vigilant oversight of the SEC, even after the regulatory reform bill is signed into law.
The FWRO case also illustrates the importance of having a strong and independent internal watchdog that can investigate, expose, and seek to remedy the agency’s management problems. This is why POGO has supported a provision in the financial reform bill that would strengthen the independence of the SEC OIG and other agency-appointed watchdogs, and we strongly urge the conference committee to include this provision in the final version of the bill.
-- Michael Smallberg