By MICHAEL SMALLBERG
On Tuesday, I appeared on the Kojo Nnamdi show along with Rolling Stone's Matt Taibbi and Jacob Frenkel, a former enforcement attorney at the Securities and Exchange Commission (SEC). The hot topic of conversation was Taibbi's recent story about an SEC enforcement attorney who is alleging that the agency systematically destroyed thousands of files related to preliminary investigations.
It was helpful to get Frenkel’s insider perspective on the SEC’s investigative process, and I appreciated his thoughts on issues such as the revolving door. But I was surprised at one point during the interview when Frenkel started to raise questions about Darcy Flynn, the SEC staffer who blew the whistle on the agency’s practice of shredding documents:
...[O]ne of the things that I always look at is, and looked at when I was at the agency is, “Where does that information come from? Does the person who is providing that information have a bone to pick with the agency?” I’m rather curious about how an enforcement lawyer who left the agency to dabble in real estate comes back into records management. Why did he leave? And who is his lawyer? Somebody who himself was a significant complainant to Congress.
So, I mean, on a scale of 1 to 10, with 10 being the most credible and 1 being the least credible, I mean, from what I know about what I’ve read in Matt’s article, which is really the extent of my source of information, my gut is telling me, this is a 1 on the credibility rating.
The following day, The Wall Street Journal revealed that Flynn previously received a $2.7 million award after filing a False Claims Act lawsuit alleging Medicare fraud. One reader commented that “[t]his is a case of a gold-digger looking for another payout. The [SEC] documents don’t seem like they’d be relavent [sic] for anything, as they were early stage discovery documents related to closed cases. This guy is a bum.”
It’s perfectly fine to debate the significance of these preliminary investigative files, and we hope that the pending investigation by the SEC Office of Inspector General (OIG) will shed more light on the content of these documents and the manner in which they were allegedly destroyed. We’re always concerned, however, when the conversation turns away from examining the factual basis of a whistleblower’s allegations, and starts to focus more on questioning the credibility and motivations of the whistleblower.
At the very least, the SEC acknowledges that documents have been destroyed—a practice that would put the agency at odds with other regulatory and enforcement bodies—and the public certainly deserves to know how the alleged file shredding might have impacted the SEC’s investigations into Bernie Madoff, Lehman Brothers, and SAC Capital, among others. In any event, Flynn made these allegations in a protected disclosure to Congress, and he should be shielded from any retaliation related to his whistleblowing.
In previous cases, the OIG has found that the SEC took retaliatory measures against employees who blew the whistle on the agency’s enforcement and examination practices.
For instance, Frenkel made reference to the fact that Flynn is being represented by Gary Aguirre—a former enforcement attorney who was fired after alleging that senior officials prevented him from interviewing Morgan Stanley Chairman John Mack during an investigation into insider trading at Pequot Capital Management. The OIG found that “there was a connection between the decision to terminate Aguirre and his seeking to take Mack’s testimony,” echoing the findings of an earlier investigation by the Senate Finance and Judiciary Committees. Aguirre further alleged that the SEC “took or threatened to take multiple courses of action to discredit, demean and disparage” him so that his allegations “would not be believed by SEC Commissioners, the Congress, the media and the public.” The SEC eventually agreed to pay $755,000 to settle Aguirre’s wrongful termination claim. Meanwhile, Aguirre provided the SEC with new evidence that compelled the agency to re-open the Pequot investigation and file insider trading charges against the hedge fund and its founder.
In another case, two employees in the SEC’s Ft. Worth office alleged that a newly announced examinations program would require staff to waste their time on quick-hit, superficial examinations. One of these employees, Julie Preuitt, had tried for years to get the agency to take enforcement action to shut down Allen Stanford’s Ponzi scheme. The OIG found that the complaints made by Preuitt and her colleague about their supervisors and the new exam program “improperly led to actions taken against them.”
In both cases, the SEC declined to take any disciplinary action against the officials cited in the OIG’s reports.
This time around, we hope the SEC will focus all of its attention on assisting the OIG with its investigation and taking whatever corrective action is needed, rather than trying to discredit the whistleblower who brought these allegations to light.
Listen to Michael Smallberg, Matt Taibbi, and Jacob Frenkel on the Kojo Nnamdi show.
Michael Smallberg is a POGO Investiagtor.
Here's someone worse than Madoff. Read then forward this link to everyone you know, so they don't get scammed: http://texsquixtarblog.blogspot.com/2009/04/who-is-worse-bernie-madoff-or-rich.html
Posted by: Tex | Sep 01, 2011 at 01:49 PM
One of the things that I always look at is when reading about attempts to smear whistleblowers is, “Where does that information come from? Does the person who is providing that information have a bone to pick with the whistleblower, or to cover for the agency or his clients?” I’m rather curious about how a former enforcement lawyer who left the agency that missed two of the biggest scandals in the financial world - Madoff and Goldman Sachs' s***ty deals - cannot empathize with someone who is trying to get the SEC to do the right thing for a change. Did he ever have to rock the boat himself? And does he sleep well at night, engaging in mud slinging of this sort?
Posted by: Not a client shill | Sep 01, 2011 at 01:47 PM