S.E.C. Files Were Illegally Destroyed, Lawyer Says
August 17, 2011
By EDWARD WYATT
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.
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