SEC employee testifies she paid a price for protest

May 14, 2011
By David S. Hilzenrath

An SEC employee who fought for years to get the agency to stop an alleged massive Ponzi scheme told a House panel that she "paid a heavy price" for protesting her boss's weak approach to exposing such scams.

In prepared testimony Friday, Julie Preuitt, a longtime employee in the Securities and Exchange Commission's Fort Worth office, said she was given a letter of reprimand and in 2008 was reassigned to report to a regional director "who would at times go weeks or even months intentionally avoiding any contact with me."

She said she interpreted her transfer as an effort to drive her out of the agency, and she argued that the move was "part of a cultural problem" that continues to undermine the SEC's effectiveness.

Preuitt was called to testify before the oversight panel of the House Financial Services Committee on the SEC's failure to stop Robert Allen Stanford's alleged $7.2 billion Ponzi scheme. The SEC's bungling of the Stanford case and the alleged retaliation against Preuitt were the subject of news stories and SEC inspector general reports almost a year ago. House Republicans revisited the subject Friday against the backdrop of a largely partisan battle over how much funding the agency should receive.

Democrats have generally argued that the agency needs a substantial budget increase to prevent more big financial frauds and crises like the 2008 meltdown that left the nation's economy reeling.

Some Republicans have countered that the agency's past failures render it undeserving of such a funding boost. They have invoked such embarrassments as the SEC's failure to stop Bernard L. Madoff's Ponzi scheme and a scandal in which agency employees were viewing pornography at work.

The SEC didn't need a bigger budget or more regulations to stop Stanford's alleged scam, said Rep. Randy Neugebauer (R-Tex.), chairman of the oversight and investigations subcommittee. The problem was that "people just didn't do their job," he said.

Preuitt reviewed the Stanford Group in 1997 and concluded that its stated financial returns were "absolutely ludicrous," SEC inspector general H. David Kotz said in testimony Friday.

In the years that followed, SEC examiners repeatedly pressed the agency to investigate, but the SEC enforcement staff made little if any meaningful effort to do so, Kotz said. Senior officials in Fort Worth thought they were being judged on the number of cases they brought, and they discouraged work on cases that were not quick hits or or slam dunks, Kotz said.Despite Preuitt's pleas, the SEC did not take enforcement action against Stanford until 2009. Kotz credited the SEC with acting on lessons learned from the Stanford case. But he said the SEC acted improperly when it punished Preuitt for opposing what she considered a flawed policy.

In fall 2007, one of Preuitt's superiors announced a new type of brokerage examination, "which would consist of interviewing a few senior personnel at brokerage firms over the course of a half day while reviewing limited, if any documentation," Preuitt said in written testimony. She said she objected because the plan was "nothing short of a subversion of the core mission."

Preuitt was reprimanded, and so was another SEC official who complained about the way Preuitt was treated, Preuitt said.

The inspector general recommended that the SEC consider disciplining officials for punishing the two. Preuitt said she is unaware of any disciplinary action, and she has not been restored to her former position. Committee member Rep. Bill Posey (R-Fla.) asked SEC officials: "Have we canonized Julie Preuitt yet? . . . She should probably be running the agency."

Carlo di Florio, who heads the SEC examination program, said Preuitt showed the kind of determination the agency encourages. He said the agency is working to give her new responsibilities.

Rep. Michael E. Capuano (D-Mass.) objected to any implication that the Stanford story is an argument for loosening regulation.

The attitude that the markets will police themselves and "that somehow regulation is not necessary . . . is just wrong," Capuano said.

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