SEC could owe millions over lease deal

May 24, 2011
By: Sarah N. Lynch

* SEC in legal dispute with building owner
* Agency signed lease, then Congress did not provide funds
* Kotz calls for disciplinary action against employees
* SEC says it is working to fix the problems
* Rep. Neugebauer says SEC should be ashamed

WASHINGTON, May 24 (Reuters) - The U.S. Securities and Exchange Commission faces a $94 million claim after it backed out of a bungled deal to lease office space in Washington, D.C.

SEC Inspector General David Kotz said in a report issued publicly on Tuesday that the SEC made numerous mistakes in securing roughly 900,000 square feet of space in the newly renovated "Constitution Center" building on 7th St SW.

The SEC signed the 10-year, $556.8 million leasing deal last year after it anticipated it would need room for additional employees to implement the Dodd-Frank financial oversight law.

The agency was later forced to renege on the deal after Congress did not provide the expected funding. Roughly 600,000 square feet will now be used by other federal regulators, but the SEC has been unable to sublease the remaining space.

The SEC's leasing woes have been of great interest to lawmakers, and the report could provide ammunition to some Republicans seeking to deny extra money for the SEC to implement Dodd-Frank.

In his report, Kotz depicts SEC staff as desperately rushing to secure the rental space at Constitution Center, an opulent 10-story building complete with Jerusalem limestone floors, marble walls and a floor-to-ceiling glass wall.

SEC Chairman Mary Schapiro preferred to obtain office space closer to the SEC headquarters, Kotz said in his report. But agency staff convinced her the SEC urgently needed to sign a lease to accommodate the new employees that would be hired under Dodd-Frank and that the SEC had already run out of options for other locations.

Just a few days after President Barack Obama signed the Dodd-Frank bill into law, the SEC was preparing to ink a deal on the lease even though there was no guarantee they would have the funds to do it.


Kotz said the SEC's Office of Administrative Services conducted a "deeply flawed and unsound analysis," including a 300 percent expansion projection over 10 years.

"We found OAS grossly overestimated the amount of space needed... and used these groundless and unsupportable figures to justify the SEC committing to an expenditure of $556,811,589 over 10 years," said his report dated May 16.

SEC spokesman John Nester said the agency is reviewing the report, and is moving forward to implement its recommendations to improve the leasing process. He also said the agency believes the owner of the building gave up its claim on the SEC once other tenants were secured.

Kotz said the agency may have violated numerous rules and regulations governing the procurement and budgeting process, including a failure to have a competitive process, a lack of review, and even the backdating of key documents.

"SEC leadership should be ashamed of themselves," said Representative Randy Neugebauer, a Republican from Texas.

"The OIG report speaks for itself - the agency that holds the private sector to high standards have made a mess of their own internal operations and have wasted taxpayers' money in the process," said Neugebauer in a statement.

Another report, issued by Kotz last year and reported by Reuters earlier on Tuesday, found the agency wasted $1 million when it acquired data storage technology through a no-bid contract that failed to work as intended.


In the leasing report, Kotz cited numerous other problems with leased office space over the years. In 2005, for example, the agency disclosed it had $48 million in unbudgeted costs due to improvements at the SEC's current headquarters.

The SEC was granted independent leasing authority from Congress in 1990 to improve efficiency, but it was not until 2009 that the agency established an office for leasing matters.

"The report portrays the SEC's leasing operation as incompetent in just about every way," said Senator Charles Grassley, a Republican from Iowa.

David Nassif Associates, the owner of the building, has demanded roughly $94 million in damages from the SEC. The company's managing general partner did not respond to an emailed request for comment.

Kotz recommended disciplinary action against the main employees involved in the leasing project, including Sharon Sheehan, the associate executive director of the Office of Administrative Services. The name of a second employee recommended for disciplinary action was redacted.

Kotz also raised serious concerns about the conduct of former SEC Executive Director Diego Ruiz. Ruiz served as the agency's executive director from August 2006 until his departure in April.

Ruiz, who announced in February that he was leaving the SEC, declined to comment on Kotz's report.

Sheehan did not reply to an email from Reuters. SEC spokesman John Nester said she would have no comment beyond his statement.

"When it became apparent that the SEC would not be receiving funding for FY 2011 to support the necessary additional staff, the leasing office worked with the landlord to swiftly identify two self-funded agencies that were able to take the majority of the space allotted to the SEC," Nester said.

Even before the report was issued, the SEC hired a new chief operating officer who is required to approve leasing decisions, Nester said.

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