Report: SEC should have kept records it destroyed

[November 02, 2011]  WASHINGTON (AP) -- The Securities and Exchange Commission should have kept thousands of documents it destroyed from preliminary investigations of financial firms over nearly two decades, according to a government report released Tuesday.

But the SEC inspector general found no definitive evidence that any of the investigations were harmed as a result.

Inspector General David Kotz said the agency violated federal rules by giving incomplete information to the National Archives last year about the records. The SEC failed to tell archives officials that the agency's 20-year policy had been to discard all documents in closed inquiries that didn't become formal investigations, the report says.

The report follows accusations from an SEC enforcement attorney, who said the agency improperly destroyed documents related to thousands of preliminary inquiries into big Wall Street banks, Bernard Madoff's Ponzi scheme and other cases.

The report stopped short of saying no harm was done by the destruction of records. Kotz said he didn't make "an exhaustive audit or review" of the potential impact.

Kotz said he was referring the matter to the agency's enforcement director for instruction or counseling of the senior enforcement officials who dealt with the National Archives. The officials should be told of the importance of providing complete responses to requests from agencies like the Archives, Kotz said.

In addition, he recommended that the enforcement division take action to determine what documents from closed inquiries are capable of being retrieved.

The report was the latest hit to the SEC's reputation, which has suffered because of its failure to detect the Madoff scheme and other cases of fraud.

Darcy Flynn, the SEC enforcement attorney, has alleged that more than 9,000 records related to preliminary investigations were destroyed. Flynn said they included inquiries into Goldman Sachs, Bank of America, Wells Fargo, Deutsche Bank, Lehman Brothers and Madoff.

Kotz's report mentions documents related to Madoff and the now-defunct Lehman Brothers, whose bankruptcy was a key milestone in the 2008 financial crisis. It says that from 1992 through July 2010, 10,468 preliminary inquiries were closed without developing into formal investigations.

The SEC acknowledged in September that some documents likely were destroyed under the former agency policy that was changed last year. However, the SEC said it didn't believe any current or future investigations were harmed by the policy, which allowed documents to be tossed out in cases that were closed when staffers decided a formal probe wasn't warranted.

The information contained in the documents that were discarded may be available from sources inside or outside the SEC, the agency said.

The SEC's current policy requires all documents to be kept whether they are part of a preliminary probe that is closed or one that develops into a formal investigation. The agency says the policy and practices meet its legal obligations.

SEC spokesman John Nester said Tuesday the agency was pleased that Kotz's review "found no evidence of any improper motive on the part of current or former SEC staff" or of harm to investigations.

"We will continue to work closely with (the National Archives) to resolve any outstanding issues," Nester said.

Sen. Charles Grassley, R-Iowa, a longtime critic of the SEC, said the documents issue "is a messy situation that the SEC needs to clean up, using the guidance and recommendations in this report as a start."

In addition, Grassley said, Kotz should conduct a separate audit of what records were destroyed and the potential effect on enforcement cases.

[Associated Press; By MARCY GORDON]

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