The Securities and Exchange Commission improperly destroyed internal documents and the explanation it gave to the National Archives was “inaccurate or misleading,” according to David S. Hilzenrath’s Washington Post article entitled “SEC misled Archives on destroying records, inspector general finds,” citing the Inspector General’s report on the subject.
According to the IG’s report, it was SEC policy to destroy all documents related to matters under investigation (MUIs) that did not lead to a full-fledged investigation. In 1992, more than 10,000 MUIs were begun that did not lead to such an investigation. Some such documents were inadvertently not destroyed, and survived on an SEC computer.
One of these matters, which apparently was not deemed worthy of investigation, involved an anonymous tip regarding Lehman Brothers Holdings that was written on the letterhead of Lehman’s auditor, Ernst and Young. The SEC opened its file on the matter in 1992 and closed it four months later. Lehman’s bankruptcy in September 2008 precipitated the financial crisis. The New York Attorney General has since sued Ernst and Young alleging that it aided Lehman in concealing billions of dollars in liabilities.
Other files that were destroyed relate to the Madoff ponzi scheme.
After having investigated the document destruction policy and filed a report on it, the Inspector General is reportedly unclear about why the SEC adopted the policy, and, according to the SEC, did not impute an improper motive to current or former SEC management or staff. Notwithstanding that, the IG’s report states that the SEC might have been motivated by “fear of criminal exposure for the SEC.”
The whistleblower who brought document destruction to light, however, pointed out that the purged documents could have been used by outsiders to hold the SEC accountable for decisions not to pursue matters brought to its attention. In addition, he said, the documents would have helped the SEC connect the dots if additional information was obtained on a matter that was initially not pursued.
The SEC also misled the National Archives by responding to their inquiry that the SEC was “not aware of any specific instances of the destruction of record,” when, in fact, officials knew of at least one specific instance from an enforcement official who altered staff that she had shredded documents and deleted e-mails. The SEC also failed to mention that it was SEC policy to destroy all such documents.
The SEC “seemed to spend more time covering tracks and drafting a lawyered-up response than just following the law and otherwise using common sense,” Sen. Charles E. Grassley (R-Iowa), was quoted as saying in a statement.
According to an article by Rolling Stone’s Matt Taibbi entitled “Is the SEC Covering Up Wall Street’s Crimes?,” Wall Street firms have persuaded the SEC’s top-level people to not pursue investigations because those top-level people frequently leave the SEC to join a firm they were supposed to be regulating (or a law firms representing the firm), sometimes suspiciously soon after upending an investigation of that firm.
It is still not clear whether the Inspector General is examining whether SEC investigations were compromised by the revolving door between SEC senior management and Wall Street.
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