Senator Chuck Grassley made news last week by publicizing a whistleblower’s claims about widespread file destruction at the Securities and Exchange Commission. Thousands of preliminary investigation files no longer exist, which hampers the SEC’s ability to identify and prosecute financial crimes. The alleged practice goes back nearly two decades, despite a federal law that grants the National Archives and Records Administration authority over preserving government files.
President Barack Obama didn’t create this problem, but his cozy relationship with Wall Street helped keep law-breaking alive at the SEC.
Matt Taibbi published a must-read Rolling Stone article on the document destruction:
For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation’s worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. […]
Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency’s records – “including case files relating to preliminary investigations” – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term “Orwellian,” devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases – known as MUIs, or “Matters Under Inquiry” – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission’s internal website. “After you have closed a MUI that has not become an investigation,” the site advised staffers, “you should dispose of any documents obtained in connection with the MUI.”
The whistle-blower is SEC attorney Darcy Flynn, who has told members of Congress that the document destruction has been going on since 1993. Last week Senator Chuck Grassley wrote to SEC Chair Mary Schapiro demanding more information about the practices Flynn described. I’ve enclosed the full text of his letter at the end of this post.
I’ve tried and failed to think of any good reason for a law enforcement agency to routinely dispose of preliminary investigation documents. It only makes sense if government officials don’t want to find wrongdoing, or want to make it more difficult for future investigators to put a case together.
Taibbi lists a few of the “dead and buried cases that Flynn submitted to Congress” here. No public interest could conceivably be served by destroying documents on potential insider trading and market manipulation by financial giants Goldman Sachs, Lehman Brothers and Deutsche Bank. According to Flynn, documents related to preliminary investigations of Ponzi schemer Bernard Madoff were among those shredded.
Flynn contacted the National Archives and Records Administration about the SEC’s practices in the summer of 2010. In response, NARA Director of Modern Records Paul Wester wrote to SEC officials demanding a halt to all improper disposal of documents and a report within 30 days. Taibbi picks up the story here:
Last August, as the clock wound down on NARA’s 30-day deadline, [SEC Enforcement Division Managing Executive Adam] Storch and two top SEC lawyers held a meeting with Flynn to discuss how to respond. Flynn’s notes from the meeting, which he passed along to Congress, show the SEC staff wondering aloud if admitting the truth to NARA might be a bad idea, given the fact that there might be criminal liability.
“We could say that we do not believe there has been disposal inconsistent with the schedule,” Flynn quotes Ken Hall, an assistant chief counsel for the SEC, as saying.
“There are implications to admit what was destroyed,” Storch chimed in. It would be “not wise for me to take on the exposure voluntarily. If this leads to something, what rings in my ear is that Barry [Walters, the SEC documents officer] said: This is serious, could lead to criminal liability.”
When the subject of how many files were destroyed came up, Storch answered: “18,000 MUIs destroyed, including Madoff.”
Four days later, the SEC responded to NARA with a hilariously convoluted nondenial denial. “The Division is not aware of any specific instances of the destruction of records from any other MUI,” the letter states. “But we cannot say with certainty that no such documents have been destroyed over the past 17 years.” The letter goes on to add that “the Division has taken steps… to ensure that no MUI records are destroyed while we review this issue.”
Translation: Hey, maybe records were destroyed, maybe they weren’t. But if we did destroy records, we promise not to do it again – for now.
When President Obama appointed Storch to the top position at the SEC’s enforcement division, Storch was a 29-year-old vice president at Goldman Sachs. He had no regulatory experience and spent most of his short career at one of the largest firms the SEC is supposed to regulate. Gee, no one could have predicted that a guy like Storch would “circle the wagons” rather than protect the public’s interest in maintaining records of criminal investigations. Could the president have found anyone less suited for this job?
Obama’s administration is crammed with Goldman Sachs executives, from Treasury Secretary Timothy Geithner to little-known but powerful officials like Storch. Here’s hoping Grassley’s requests lead to “change we can believe in” at the SEC. We certainly didn’t get that from Obama.
CORRECTION: A lot of former Goldman Sachs executives work in the Obama administration, including Geithner’s chief of staff in the Treasury department, but Geithner never worked for Goldman Sachs himself.
Share any relevant comments in this thread.
Senator Chuck Grassley’s August 17 letter to Mary Schapiro, chair of the U.S. Securities and Exchange Commission:
I recently received a letter regarding Mr. Darcy Flynn, a thirteen year veteran of the Securities and Exchange Commission (SEC). Mr. Flynn alleges that SEC staff has destroyed over 9,000 files related to Matters Under Investigation (MUI). As you know, a MUI is the first step the SEC takes when credible information about a possible securities law violation is received. These records may contain critical information that could be extremely useful in piecing together complex cases, even if not immediately pursued.
Further, Mr. Flynn claims that the SEC has destroyed files related to MUIs even in extremely important cases such as the investigation of Bernard Madoff, Goldman Sachs trading in AIG credit default swaps in 2009, financial fraud at Wells Fargo and Bank of America in 2007 and 2008, and insider trading investigations at Deutsche Bank, Lehman Brothers, and SAC Capital. If Mr. Flynn’s allegations are correct, the intentional destruction of at least 9,000 MUIs would appear to greatly handicap the SEC’s ability to create patterns in complex cases and calls into question the SEC’s ability to properly retain and catalog documents.
In light of Mr. Flynn’s allegations, I would appreciate answers to the following questions:
1. Has the SEC routinely destroyed MUIs, and if so, why?
2. Is the SEC not concerned that destroying these files may have harmed future investigations? If not, please explain why not?
3. Is it possible for the SEC to retrieve any of this information?
4. Is Mr. Flynn correct that the SEC has destroyed MUIs related to Bernard Madoff, Goldman Sachs, Wells Fargo, Bank of America, Deutsche Bank, Lehman Brothers, and SAC Capital? If so, please explain why.
5. Is it current SEC policy to destroy any files related to MUIs if the investigation does not progress to a formal order approved by the Commission?
6. What is the SEC’s understanding of its legal obligations to maintain and archive records related to MUIs and how is the SEC’s policy and practice consistent with those obligations?
Thank you for your cooperation and attention in this matter. I would appreciate a response by August 31, 2011. If you have any questions, please contact Chris Lucas on my staff at (202) 224-5225.
Sincerely,
Chuck Grassley