By MICHAEL SMALLBERG
The Securities and Exchange Commission (SEC) is in the news once again this week with the release of the Office of Inspector General's (OIG) highly anticipated report on former SEC General Counsel David Becker's role in determining the proper method for compensating victims of Bernard Madoff's Ponzi scheme, at a time when he and his brother had inherited $2 million from a family Madoff account and held a financial stake in the compensation process.
The OIG found that Becker “played a significant and leading role” in determining the SEC’s recommendation on the compensation process, even though he knew this recommendation could potentially impact whether the Madoff Trustee would bring a lawsuit against him. Becker also provided comments on a proposed amendment that would have limited the Trustee’s ability to bring such a lawsuit.
Perhaps the biggest news is that the OIG has referred its findings to the Public Integrity Section of the Justice Department. At the same time, the report also raises troubling questions about other SEC officials who were aware of Becker’s potential conflict of interest but took no action to address it.
The report paints a particularly damning picture of the role played by former SEC Ethics Counsel William Lenox. It turns out that Becker consulted with the Ethics Office on two separate occasions regarding the Madoff account connected to his mother’s estate, and was advised that he did not have a conflict and did not need to recuse himself from working on the compensation issue. The OIG found that “this advice appears to have been based on incorrect assumptions,” and that Lenox did not take additional steps to investigate Becker’s involvement in the Madoff liquidation process. The OIG also reported that Lenox and the Ethics Office “considered recusals in Madoff-related matters differently in situations that did not involve Becker.”
Lenox has retained the pro bono services of former SEC Chairman Harvey Pitt, who stated that, based on the OIG’s questions, “the result was a foregone conclusion.” Pitt ripped into the OIG in testimony last week before the House Financial Services Committee, stating that IG David Kotz “seemingly operates on the assumption that he can effectively terrorize innocent employees under the guise of upholding the law but not follow the law himself, even with respect to basic constitutional and ethical requirements,” and that the IG’s investigative process is “Kafka-esque, fraught with diatribes and bereft of professional integrity.”
This isn’t the first time the OIG has cited SEC employees for misconduct in cases where the employees received advice from the Ethics Office. For instance, in its report on alleged insider trading by SEC employees—which was also referred to the Justice Department—the OIG reported that the employees sought approval from the Ethics Office for most of the trades that later aroused suspicion.
This also isn’t a problem that’s unique to the SEC. POGO has highlighted several instances in which it appears that ethics officials at the Bureau of Land Management did not take appropriate action or provide knowledgeable advice when confronted with revolving door and conflict-of-interest issues.
We’re glad to see that the SEC has recently taken measures to improve its ethics program. At last week’s National Government Ethics Conference, SEC officials highlighted the release of an online searchable ethics handbook, the agency-wide ethics emails that are now being distributed twice a week, and a new online, real-time database in which SEC staff are required to report their financial holdings and pre-clear securities transactions. The OIG also recommended that the SEC Ethics Counsel should report directly to the Chairman rather than the General Counsel, and that the SEC Ethics Office should take all necessary steps to ensure that its advice is “well-reasoned, complete, objective, and consistent” and “documented in an appropriate and consistent manner.”
Along these lines, the Government Accountability Office (GAO) recently recommended that the SEC Chairman “establish standards for documentation of ethics advice.” We made a similar recommendation in our report on the SEC revolving door.
Tomorrow, SEC Chairman Mary Schapiro, Inspector General Kotz, and Becker will be appearing at a joint Congressional hearing to examine potential conflicts of interest at the SEC. We hope the Members use this opportunity to examine how the SEC has improved its ethics program since the OIG investigation and explore what more needs to be done.
Michael Smallberg is a POGO Investigator.
Image via Flickr user Abode of Chaos.
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