Video Friday: Who's Watching the SEC?

A longtime SEC staff attorney has blown the whistle on the agency, and has accused them of destroying investigative documents, WSJ’s Jenny Strasburg reports on the Markets Hub. Report due in September.

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 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.

The document disposal, first reported by Rolling Stone magazine on Wednesday, is the subject of inquiries by the Senate Judiciary Committee; the National Archives and Records Administration, and the inspector general of the S.E.C.

Whistle-blower Darcy Flynn alleges 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. (S.E.C. Files Were Illegally Destroyed, Lawyer Says, NYTimes, 8/17/2011)

Let’s hope the SEC gets it right. The main tool they provide to shareowners is a bit of transparency into corporate governance. It wouldn’t hurt to take a long look in the mirror to seek if those outward policies also need to be projected inward.

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