UPDATE: SEC Insider Accuses Agency Of Destroying Records Of Wall Street Probes
August 17 2011 - 6:13PM
Dow Jones News
A Securities and Exchange Commission employee is accusing the
agency of illegally destroying thousands of files pertaining to
formal SEC inquiries into possible wrongdoing on Wall Street.
SEC enforcement lawyer Darcy Flynn alleges the SEC routinely
destroyed the files as a matter of internal policy in violation of
federal rules, according to a letter last month from Flynn's lawyer
to Sen. Charles Grassley (R., Iowa).
Flynn, through his lawyer, says the SEC has trashed 9,000 files
since 1993 on so-called "matters under inquiry," including
inquiries into possible securities law violations at Goldman Sachs
Group Inc. (GS), Lehman Brothers, Deutsche Bank AG (DB), and hedge
fund SAC Capital as well as Bernard L. Madoff's fraud.
All the destroyed files relate to inquiries that were closed
after SEC staff decided not to open a formal investigation.
Grassley sent a letter to SEC Chairman Mary Schapiro Wednesday
asking her to respond to several questions about Flynn's
claims.
"From what I've seen, it looks as if the SEC might have
sanctioned some level of case-related document destruction," the
senator said in a statement. "It doesn't make sense that an agency
responsible for investigations would want to get rid of potential
evidence."
SEC Inspector General David Kotz said his office is
investigating the matter and will issue a report by the end of
September.
Federal agencies are required by law to establish policies for
managing their records with the National Archives and Records
Administration. The SEC for years directed its employees to destroy
all documents connected to matters under inquiry that never
progressed to formal investigations. Last year, Flynn raised
concerns with the archives office about the SEC's policy. The SEC
subsequently backed off from instructing staff to dispose all
documents collected during inquiries.
"Not every document that comes into an agency's possession in
the course of its work meets the definition of a record covered by
the retention requirements," SEC spokesman John Nester said. He
added the SEC keeps track of all its inquiries, including what
staff looked at, the reason why the inquiry was closed and a
description of any documents collected.
The National Archives and Records Administration believes the
SEC may have improperly destroyed federal records, according to a
letter it sent to the SEC last summer after Flynn raised his
concerns. The letter was excerpted in Flynn's attorney's letter to
Grassley. A spokeswoman from the archives office didn't respond to
a request for comment.
Rolling Stone magazine reported on Flynn's allegations and his
discussions on the matter with Congress earlier Wednesday.
Formal SEC inquiries into potential securities law violations
typically are either closed or ramped up into full investigations
within days or weeks, according to people familiar with them. Files
on such inquiries, therefore, don't usually contain a lot of
important information, the people said.
Flynn, a 13-year SEC veteran, alleges that one of the destroyed
files related to an inquiry into possible financial fraud at Lehman
Brothers in 2002 and insider trading at the now-defunct bank in
2005. Other destroyed files concerned possible insider trading of
credit default swaps at Goldman Sachs in 2009 and possible insider
trading and currency manipulation at SAC Capital in 2006 and 2010,
respectively. Three Deutsche Bank files were also allegedly
destroyed, pertaining to 2002 inquiries into possible insider
trading and market manipulation, and a 2004 investment-advisory
inquiry.
Files were also destroyed of inquiries into alleged financial
fraud at Citigroup (C), Wells Fargo & Co. (WFC), and Bank of
America (BAC), Flynn alleges.
Spokesmen for Goldman, SAC Capital, Citi, Wells, and Bank of
America declined to comment. A spokesman from Lehman didn't respond
to a request for comment. A spokesman for Deutsche said, "as a
matter of bank policy we cannot comment on regulatory matters,
particularly those that have been closed for nearly a decade."
-By Liz Moyer and Jessica Holzer, Dow Jones Newswires;
212-416-2512; liz.moyer@dowjones.com
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