SEC IG Kotz Shakes Things Up
22 Corporate Crime Reporter 41, October 23, 2008

When H. David Kotz took over as Inspector General (IG) at the Securities and Exchange Commission (SEC) in December 2007, he vowed to restore credibility of the office.

His predecessor had just been savaged by a Senate report over the SEC’s handling of the Pequot Capital Management insider trading matter and the failure of the IG’s office to effectively hold the SEC’s feet to the fire.

And so Kotz has.

Kotz has been harshly critical of the SEC – and in particular its Enforcement Division and its director, Linda Thomsen – for cutting deals with white collar defense attorneys while at the same time overriding the recommendations of line SEC enforcement staff.

In one report, Kotz called on the SEC to consider disciplining Thomsen for her role in the Pequot case. That was the case where a line SEC investigator, Gary Aguirre, says he was fired for trying to interview John Mack, currently the CEO of Morgan Stanley. Kotz was critical of Thomsen for negotiating with Morgan Stanley outside counsel Mary Jo White, a partner at Debevoise & Plimpton – without first discussing the investigation with Aguirre.

In a second report, Kotz was critical of the Enforcement Division for dropping the ball on an investigation of Bear Stearns. Line attorneys recommended bringing a case, but supervisors in the Miami office were buddies with Bear Stearns outside attorney – Arnold & Porter’s Michael Trager – and the case was never brought.

And just recently, Kotz received an anonymous tip alleging that, in the Bear Stearns case, Thomsen gave inside information to Stephen Cutler, the general counsel for JP Morgan Chase, about the state of ongoing SEC investigations of Bear Stearns. Prior to joining JP Morgan Chase, Cutler was himself SEC enforcement director.

According to the anonymous complaint to Kotz, Cutler called Thomsen “to get assurances and insider knowledge from the SEC to help Morgan’s negotiating position.”

Morgan acquired Bear Stearns in May.

“This inside information, gotten through a personal relationship, would be critical in helping Morgan put together a low-ball bid to Bear and the US government,” the whistleblower wrote to Kotz. “Morgan could cite litigation (as well as valuation) uncertainties, while having the assurance (that at least from the SEC) the risk of litigation was not really that great.”

The whistleblower said that Thomsen “made representations about the investigation without talking. . .to the staff doing the investigation.”

Senator Charles Grassley (R-Iowa) released the anonymous complaint this week.

“The similarity of these allegations to the conduct criticized in our report and the Inspector General’s report is striking,” Grassley said. “Such conduct would reinforce the appearance that Enforcement decisions, and disclosures of information about them, are sometimes based not on the merits, but rather on access to senior officials by influential representatives of power brokers on Wall Street.”

Kotz said that his office is investigating the complaint.

In an 45 minute interview earlier in the week, Kotz told Corporate Crime Reporter that he has about 30 cases under investigation.

He has a staff of about 14 full time auditors and investigators.

“When I first came here, given the criticism the office took from Congress and the Senate report, I pledged to restore the credibility of the office, to ensure that the office was aggressive, viable and vibrant, and looked into important matters and issue important reports that don’t pull any punches,” Kotz told Corporate Crime Reporter. “And I believe that I have to a large extent achieved that with the issuance of these reports. Internally, it is very clear that the Office of Inspector General is an important office in the SEC. It’s going to be scrutinizing the SEC’s operations carefully. And where it deems appropriate will criticize the agency.”

The SEC has been critical of Kotz for the reports he has issued.

“It’s obviously a very personal matter when you are auditing or investigating someone,” Kotz said. “And so it is not unusual for someone to say – I don’t think I did anything wrong. Or – you were too critical.”

Does Kotz use the SEC’s press office to put out reports to the public?

“We don’t have our own press office,” Kotz said. “But we don’t use the SEC’s press office to put out our reports. Our audit reports go on the web almost immediately when they are issued. That law requires us to do that. We don’t normally have much contact with the press at all. We just issue our reports. And whatever happens happens. We don’t have anybody in this office who deals with the press. And we don’t work through the SEC press office.”

The SEC IG’s office is in the main SEC building, “several floors” away from the Enforcement Division.

Do things get icy in the building?

“I haven’t experienced anything,” Kotz said. “Through the conduct of our investigations, we have dealt with many SEC employees. In fact, we have received many calls from folks in the Enforcement Division after the issuance of these reports, thanking us for the work, telling us how much they appreciated that we provided the information, complimenting us on the job we did. So, I have not felt anything icy.”

One of the first things that Kotz did when he arrived at the SEC was set up an anonymous tip hotline: 877.442.0854.

Or you can just complain to him in writing at [email protected].

[For a complete transcript of the Interview with H. David Kotz, 22 Corporate Crime Reporter 41(12), October 27, 2008, print edition only.]



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