August 18, 2011

Not a Good Headline: “SEC Destroyed Files on Wall Street Probes”

Going through the news headlines as I return from vacation, I can see that it’s more of the same for the SEC: getting pummeled in the press. The latest is a story broken by “Rolling Stone” magazine – of all things – about how the Enforcement Division destroyed thousands of documents when things didn’t pan out on a MUI (“matter under inquiry”). The story broke due to an investigation led by Sen. Grassley – who’s been gunning for the SEC for quite some time – after he learned of revelations by a current Enforcement Staffer who works in the records preservation area of the Division and who’s claiming protection under whistleblower laws.

This excerpt from an article in today’s NY Times tells the story as we know it so far (here’s the WSJ article fyi):

An enforcement lawyer at the Securities and Exchange Commission says that the agency illegally destroyed files and documents related to thousands of early-stage investigations over the last 20 years, according to information released Wednesday by Congressional investigators. The destroyed files comprise records of at least 9,000 preliminary inquiries into matters involving notorious individuals like Bernard L. Madoff, as well as several major Wall Street firms that later were the subject of scrutiny after the 2008 financial crisis, including Goldman Sachs, Lehman Brothers, Citigroup and Bank of America. The S.E.C. is the very agency that is charged with making sure that Wall Street firms retain records of their own activities, and has brought numerous enforcement cases against firms for failing to do so.

The agency’s records were routinely destroyed under an S.E.C. policy, since changed, that called for the disposal of records of a preliminary inquiry that was closed if it did not get upgraded to a formal investigation, according to Congressional records and people involved in inquiries into the matter. The agency believes that both the original policy and the new rules comply with federal document-retention laws. John Nester, an S.E.C. spokesman, said that while the agency was not required to retain all documents, it changed its policy last year regarding destruction of files for “matters under investigation,” the category of initial inquiry by the S.E.C.’s enforcement division that is the subject of the current scrutiny.

Changes were made to the S.E.C. policy after questions about the document destruction were raised in early 2010 by Darcy Flynn. Mr. Flynn, an employee of the S.E.C.’s enforcement division for 13 years, began a new job in January 2010 helping to manage the disposition of records for the division. Mr. Flynn, who continues to work at the S.E.C., has sought protection under federal whistle-blower laws.

Dodd-Frank: Business Groups Targeting Next Batch of Rules to Attack in Court

As I blogged several weeks ago, the DC Circuit’s proxy access decision in the Business Roundtable/Chamber lawsuit could have implications far beyond proxy access. This article from today’s NY Times notes that business groups have been meeting in DC – one meeting was dubbed “Dodd-Frank Excesses” – to determine which rules to haul into court next, with the SEC’s new corporate whistleblower program and a provision surrounding the extraction of oil and natural gas from foreign countries being identified as two potential targets. According to the article, the SEC will be hiring 8 economists over the next 2 years to help with its new burdens during the rulemaking process.

How Much Time Did the SEC Spend on Proxy Access Rulemaking? 21,000 Staff Hours

As I blogged two weeks ago, a trio of House Representatives sought information about how many SEC Staff hours were spent on proxy access rulemaking via this letter. Now, the SEC has responded that 21,000 Staff hours – valued at $2.2 million – were spent writing the rule and $315,000 defending it against a court challenge, as noted in this Bloomberg article.

– Broc Romanek