S.E.C. Files Were Illegally Destroyed, Lawyer Says

August 17, 2011
By EDWARD WYATT - New York Times

An enforcement lawyer at the Securities and Exchange Commission says that the agency illegally destroyed files and documents related to thousands of early-stage investigations over the last 20 years, according to information released Wednesday by Congressional investigators.

The destroyed files comprise records of at least 9,000 preliminary inquiries into matters involving notorious individuals like Bernard L. Madoff, as well as several major Wall Street firms that later were the subject of scrutiny after the 2008 financial crisis, including Goldman Sachs, Lehman Brothers, Citigroup and Bank of America.

The S.E.C. is the very agency that is charged with making sure that Wall Street firms retain records of their own activities, and has brought numerous enforcement cases against firms for failing to do so.

The agency's records were routinely destroyed under an S.E.C. policy, since changed, that called for the disposal of records of a preliminary inquiry that was closed if it did not get upgraded to a formal investigation, according to Congressional records and people involved in inquiries into the matter. The agency believes that both the original policy and the new rules comply with federal document-retention laws.

John Nester, an S.E.C. spokesman, said that while the agency was not required to retain all documents, it changed its policy last year regarding destruction of files for "matters under investigation," the category of initial inquiry by the S.E.C.'s enforcement division that is the subject of the current scrutiny.

Changes were made to the S.E.C. policy after questions about the document destruction were raised in early 2010 by Darcy Flynn. Mr. Flynn, an employee of the S.E.C.'s enforcement division for 13 years, began a new job in January 2010 helping to manage the disposition of records for the division. Mr. Flynn, who continues to work at the S.E.C., has sought protection under federal whistle-blower laws.

The document disposal, which was first reported by Rolling Stone magazine on Wednesday, is the subject of inquiries by the Senate Judiciary Committee; the National Archives and Records Administration, which oversees laws governing federal agency records; and the inspector general of the S.E.C., according to the records and to people involved in the investigations.

In addition to whether the document disposal violated federal laws about government records, officials are concerned that the S.E.C. policy might have hindered later investigations into the same people or companies or covered up wrongdoing.

"These records may contain critical information that could be extremely useful in piecing together complex cases, even if not immediately pursued," Senator Charles E. Grassley, an Iowa Republican who is the ranking member on the Senate Judiciary Committee, wrote in a letter to the S.E.C. on Wednesday.

Mr. Nester declined to comment on Mr. Grassley's letter or on a letter to Mr. Grassley from a lawyer for Mr. Flynn that laid out the allegations in detail.

H. David Kotz, the S.E.C. inspector general, said that he was investigating the issue and hoped to complete a report by the end of September. A spokesman for the National Archives did not respond to requests for comment late Wednesday afternoon.

The National Archives wrote to the S.E.C. last year, saying that it "appears that there has been an unauthorized disposal of federal records," and asked for further information, according to Mr. Flynn's chronology.

Mr. Flynn said that S.E.C. officials discussed whether to lie about the document destruction because they might be open to criminal liability. Unlawful and willful destruction of federal records is punishable by up to three years in prison.

The S.E.C. replied to the National Archives in a letter, saying that it was "not aware of any specific instances of the destruction of records" that should have been retained. It added that it "cannot say with certainty that no such documents have been destroyed over the past seventeen years."

The letter from Mr. Flynn's lawyer said that the old document destruction policy gave S.E.C. officials assurance that if they closed an inquiry without upgrading it to a formal investigation, there would be no record of their actions.

It is common for S.E.C. employees to leave the agency for the private sector and then begin representing clients before the agency. Mr. Flynn contends that the practice increases the likelihood that S.E.C. investigators could do undetected favors for former colleagues and their clients by quashing investigations.

Whether that revolving door led to the closing of an investigation in 2001 involving Deutsche Bank and the destruction of the files is part of the investigation by the S.E.C.'s inspector general.