Senate Finance Committee Ranking Member Charles Grassley (R-IA) sent a scathing letter to Securities and Exchange Commission (SEC) Chairman Mary Schapiro last week raising concerns that an SEC regional office has been retaliating against whistleblowers and blatantly ignoring the Office of Inspector General’s (OIG) recommendations for disciplinary action.
Senator Grassley’s letter was posted yesterday afternoon by The Washington Post’s Zachary Goldfarb, who has more background on this incredible story over at Market Cop.
The OIG reported earlier this year that examiners at the SEC’s Fort Worth Regional Office (FWRO) were raising concerns about Allen Stanford’s Ponzi scheme as early as 1997—more than a decade before the SEC finally got around to cracking down on the $7.2 billion fraud. One of the first people to sound the alarm was veteran examiner Julie Preuitt.
Years later, Preuitt became concerned about a new examination initiative known as the broker-dealer Risk Assessment Verification Examinations (RAVEs) program, which was introduced by two senior FWRO officials—Rose Romero and Kimberly Garber. Preuitt believed that the program 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 Stanford scheme.
But after she raised concerns to officials at the FWRO and in Washington, D.C., Preuitt claimed she was subjected to a number of retaliatory actions initiated by Romero and Garber. FWRO Branch Chief Joel Sauer, who complained about the RAVEs program and protested the retaliatory actions taken against Preuitt, also claims to have suffered retaliation at the hands of Romero and Garber.
This prompted another investigation by the OIG, which largely confirmed the allegations of whistleblower retaliation against Preuitt and Sauer, and recommended that disciplinary action be taken against the two senior FWRO officials.
A few months ago, Darren Barbee at the Ft. Worth Star-Telegram revealed that the SEC was ignoring the OIG’s recommendations, and may have even misled Congress about the FWRO’s history of investigating the Stanford fraud.
It turns out the SEC was declining to discipline Romero and Garber because they had “cleared their moves with human resources.” POGO obtained an email from an SEC official who explained that Garber and Romero couldn’t possibly have retaliated against Preuitt and Sauer because they had checked with the Human Resources department before taking action, and because HR had no reason to retaliate against anyone.
The Star-Telegram also reported that Romero gave two different responses when asked about Preuitt’s current position at the SEC, and made misleading statements about the FWRO’s Stanford investigation when testifying at an August 2009 field hearing before the Senate Banking Committee.
Senator Grassley’s letter to Chairman Schapiro has now raised additional concerns about the “extremely disturbing” culture of whistleblower retaliation at the FWRO.
Senator Grassley reminded Chairman Schapiro of her earlier promise “to value whistleblowers and ensure that they are able to make protected disclosures in order to help managers improve operations at the Commission.” He was clearly less than impressed with the SEC’s explanation as to why the senior FWRO officials had not been disciplined:
The implication of this explanation is that a retaliatory personnel action can be laundered of its retaliatory intent by simply consulting with others who had no retaliatory intent and obtaining their concurrence. Such a policy would make a mockery of whistleblower protections throughout government. Unless the “neutral” officials provided the employees with notice and an opportunity to be heard, then the employees have received no meaningful due process and the decision was blessed based on hearing only half of the story (emphasis added).
Senator Grassley also pointed out that Preuitt now “supervises zero employees, lacked a position description for her new duties for eighteen months, and received no performance evaluations since being placed in her new role.” SEC officials claimed that Preuitt was assigned to head up a regional task force, but Senator Grassley stated that her assignment took place “only after she was issued a letter of reprimand and only after she attended mandated executive coaching sessions.”
The SEC has apparently instructed this executive coach not to provide answers to Senator Grassley’s staff, raising “several red flags about what exactly the SEC is trying to hide.”
Senator Grassley is requesting that “the senior-most SEC official responsible for these decisions” be made available to speak with his staff, and has demanded that the SEC provide documents describing the decision to not discipline the senior FWRO officials.
Thanks to a provision in the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC is now authorized to provide expanded rewards and protections to outside whistleblowers who provide the agency with tips leading to monetary sanctions (an aspect of the agency's operations that Schapiro said was under review early last year). We hope this program raises the profile of whistleblowing at the agency. But in the meantime, the SEC also needs to protect its own employees who expose the misconduct of senior officials. In the case of the FWRO whistleblowers, it appears these protections were nowhere to be found.
The SEC also has an unfortunate history of ignoring the OIG’s recommendations 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.
An updated analysis by POGO confirms that the SEC has repeatedly ignored the OIG’s recommendations for disciplinary action, especially in the cases of senior officials who are cited for misconduct.
Senator Grassley has been a long-time advocate on behalf of whistleblowers, particularly at the SEC. Several years ago, his office released a comprehensive report showing that the SEC had retaliated against former enforcement attorney Gary Aguirre, who was terminated after he sought to subpoena John Mack in an insider trading investigation. His continued advocacy on behalf of Aguirre eventually led to a $750,000 settlement for wrongful termination.
In recent months, Senator Grassley has also raised concerns with Chairman Schapiro about a “loose lips” memo sent around to SEC employees, and about a disclosure made by an SEC whistleblower who described how his office had become demoralized after the agency failed to take disciplinary action against a senior official who was caught viewing pornography on an agency computer.
Kudos to Senator Grassley for exposing the culture of retaliation at the FWRO, and for working to ensure that Chairman Schapiro protects whistleblowers at the agency. We urge Congress to consider holding additional hearings to get to the bottom of this issue.
-- Michael Smallberg