The Securities and Exchange Commission (SEC) may not be taking adequate steps to ensure that all former employees are fully complying with post-employment and conflict-of-interest rules, according to recent investigative reports issued by the SEC Office of Inspector General (OIG). The reports--which are nowhere to be found on the websites of the SEC or OIG (although this wouldn't be the first time a report went unposted)--were disclosed in the OIG's latest semiannual report to Congress.
In one case, the OIG launched an investigation after Senator Charles Grassley (R-IA) raised concerns that Elizabeth King, a former Associate Director of the SEC’s Trading and Markets Division, had left the agency to go work for Getco, LLC, a high-frequency trading firm. Senator Grassley was particularly concerned about King’s involvement in the SEC’s “flash crash” investigation in light of her decision to go work for Getco.
According to its semiannual report, the OIG found no evidence that King violated any post-employment provisions. After King was contacted by Getco about future employment, she raised the issue with the SEC Ethics Office, filed an online recusal form, and was soon “recused from particular rulemakings.”
However, the OIG also found that a “lack of proper record keeping at the SEC made it difficult to determine from which matters [King] was, in fact, recused and on which matters [she] continued to work after beginning employment discussions.” In addition, the OIG raised concerns that employees in the SEC’s Ethics Office do not document the advice they provide to SEC staff.
Furthermore, the OIG investigation found that the Office of Government Ethics (OGE), at the SEC’s request, had exempted all SEC employees on the SK pay scale from the one-year “cooling off” ban that would generally prevent certain former senior officials from appearing before the Commission in a representative capacity for one year after leaving office. According to the OIG, “[t]his automatic exemption for SK employees has enabled some former SEC employees who were highly compensated and held influential positions to evade the ban, even though they are the very type of employees the ban was intended to cover” (emphasis added).
In a separate matter, the OIG launched an inquiry after receiving a confidential tip that a former senior official may have violated a government-wide conflict-of-interest statute that generally limits federal employees in the type of work they can perform after leaving government. The OIG found no evidence to suggest that the former senior official violated the federal conflict-of-interest statute. However, the OIG did find that the former official violated an SEC rule under which former employees are required to file post-employment statements if they appear before the agency on behalf of an outside client within two years of leaving government.
Finally, the OIG revealed in its semiannual report that it has launched an investigation into an anonymous complaint alleging that a “senior [SEC] official had a secret conversation with a prominent defense lawyer representing [a] company, who was also a good friend and former colleague of the senior official, and that during this secret conversation, the senior official agreed to drop the contested fraud charges against an individual.”
Last month, POGO issued its own report on the SEC’s oversight of former employees who leave the agency to go work for the SEC’s regulated entities and the firms that provide these entities with legal, accounting, and consulting services. We raised questions about the SEC’s policies and procedures for reviewing potential conflicts of interest affecting former employees, and also cited several examples of employees who may have failed to file the required post-employment statements, echoing many of the same concerns raised in the OIG’s investigations.
Meanwhile, the SEC revolving door continues to spin at full speed. Just today, Simpson Thacher & Bartlett LLP announced it has hired the former head of the SEC’s Foreign Corrupt Practices Act (FCPA) Unit. And earlier this week, it was revealed that a former SEC enforcement attorney, who had gone to work for the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), is now leaving the federal government to go head up the securities litigation practice at Mayer Brown. (You can use our new database to find out who else has left the SEC for Simpson Thacher & Bartlett LLP and Mayer Brown.)
As described in The Washington Post, the SEC OIG has also issued recent investigative reports on an SEC attorney who disclosed the name of a confidential informant in an FBI investigation, SEC contractors who began working at the agency before receiving clearances, an SEC employee who invested in a suspected Ponzi scheme and gave other investors a “false sense of hope” that the business was legitimate, and SEC employees who were caught viewing pornography. The OIG has also issued recent reports on the SEC’s deeply flawed decision to sign a $556.8 million, 10-year lease in downtown Washington, DC, and its awarding of a non-competitive $1 million contract to Apple for computer equipment that “immediately failed” to work as intended.
Michael Smallberg is a POGO Investigator.