H. David Kotz, the inspector general in charge of policing conflicts of interest inside the U.S. Securities and Exchange Commission, may face further questions about his own activities.
The watchdog is already under scrutiny for a videotaped interview he gave to a financial adviser who uses it in marketing a “crash-proof” retirement plan on the Internet and a paid radio show. Phillip Cannella III, the adviser, rejected an SEC request that he remove the interview from his website, saying he obtained it from Kotz without misrepresentation.
Now, Kotz has confirmed that Cannella got him three tickets to a sold-out football game between the Philadelphia Eagles and New York Giants two months after the interview. Kotz paid $95 per ticket, according to Cannella, for club-level seats in the Philadelphia stadium. Eagles spokesman Rob Zeiger, who said tickets in that section don’t have a price stamp, said the team values the seats Kotz used at $240 each.
Cannella, the chief executive officer of First Senior Financial Group who did the 75-minute interview with Kotz in late July, said he offered the tickets as a gesture of gratitude for his “truthful and forthcoming” remarks. Kotz refused to take them unless he could pay, and sent a $285 check a few days after the Sept. 25 game.
“All my actions related to Phil Cannella’s radio program were completely vetted and cleared by the SEC Ethics Counsel,” Kotz said in an e-mailed statement to Bloomberg News. “None of my actions were inappropriate or improper and no one at the SEC has ever indicated to me otherwise.”
Kotz, who has served as inspector general for four years, has been the subject of complaints by current and former officials who have said some of his probes are overly aggressive and his reports lack evidence of wrongdoing. Kotz and his supporters say his work has helped the agency to recover from missteps such as overlooking the Bernard Madoff Ponzi scheme.
Cannella, who said he’s licensed as an insurance broker in more than 40 states, isn’t regulated by the SEC because he doesn’t sell securities.
After the interview was posted on Cannella’s website, the SEC general counsel’s office contacted Kotz with concerns the video clips could be seen as investment advice or an endorsement of financial services, according to two people briefed on the matter. Kotz told the agency he would ask the Council of Inspectors General on Integrity and Efficiency to look into whether he said or did anything improper.
It isn’t known if the group is also reviewing the football tickets, which Kotz requested from Cannella’s firm in a Sept. 2 e-mail from his SEC account.
“Now that football season is upon us, I wanted to let you know that I spoke with our ethics office who advised me that I was authorized to accept the football tickets as long as I paid the face value,” Kotz wrote, adding that his children “are very excited.” The Eagles lost, 16-29.
Cannella said he obtained Kotz’s tickets from a CBS Radio station, WPHT in Philadelphia, which runs his program. He said he told Kotz to pay $95 apiece because that was the face value of Eagles tickets that Cannella uses in another section of the stadium. Cannella said he endorsed Kotz’s check over to the radio station.
Geoffrey Hazard, a professor at the University of California Hastings College of the Law and a legal ethics specialist, said that Kotz probably got “a bargain considering what the market price really is” for the game.
“However passionate a fan you might be of the Eagles, it’s just imprudent” to take the tickets, Hazard said.
The SEC’s ethics chief, Shira Pavis Minton, said in an e- mail that she “advised Mr. Kotz that he should pay for any tickets he accepted and to be mindful of optics concerns if the tickets were corporate or box tickets.” She said she told Kotz, “as long they were regular tickets, he should pay what anyone on the street would pay.”
Asked about Kotz’s contention that she fully vetted his interview with Cannella, Minton said that as head of the inspector general office Kotz has authority to decide on his own how to handle interview requests.
“I was asked by Mr. Kotz about giving a 15-minute radio interview,” she said. “I told Mr. Kotz there was no prohibition to giving such an interview and provided Mr. Kotz with the SEC’s internal guidelines for speaking engagements.”
The guidelines say SEC employees should “avoid inadvertently participating in an event that promotes the sponsor’s business interests rather than the public’s interest.”
‘Giving the Impression’
Richard Painter, a securities professor at University of Minnesota Law School who was the White House’s chief ethics lawyer from 2005 to 2007, said Kotz should have never agreed to the interview in the first place.
“I can’t imagine anything worse than giving the impression that there is an official SEC endorsement of an investment product,” said Painter, who has written a book on government ethics reform. “The bottom line is nobody at the SEC, in their official capacity, should be doing an infomercial.”
Cannella plays the Kotz interview, which he videotaped at the SEC’s Washington headquarters, on his radio show, on his website, www.crashproofretirement.com, and at seminars he holds for retirees at restaurants in the Philadelphia area.
The company, based in King of Prussia, Pennsylvania, puts together individual plans for clients and then earns a commission on fixed-index annuities they buy from an insurance company. The investments are “outside of the securities industry” and “many of them have outperformed the markets since their inception with no market risk, no market fees, no upfront commissions or sales costs,” Cannella said.
In more than a dozen edited segments of the Kotz interview that are posted online, the inspector general discusses issues ranging from the Bernard Madoff fraud to the difficulties the SEC faces policing Wall Street. A press release issued by Cannella’s company highlighted Kotz’s suggestion that retirees consider cutting their investments in stocks.
“Well I wouldn’t presume to tell anyone how to invest their money and I’m not an investment adviser,” Kotz told Cannella. “Now I think we do have a situation today where so much money is in the stock market where people’s lives are so affected by it, that sometimes it may make sense to take things out in turbulent times to ensure that you’re not living and dying, so to speak, by the Dow Jones going up and down.”
Robert W. Barton, a special trial counsel at the SEC, asked Cannella in an Oct. 3 letter to put a disclaimer on the videos to clarify that neither the SEC nor Kotz endorsed, sponsored or had agreed to promote the firm. Cannella complied.
After Bloomberg reported on the interview last month, Barton wrote to Cannella again on Nov. 29, asking him to remove the video segments from his websites and YouTube because their use “is inconsistent with Mr. Kotz’s understanding of the purpose and planned use of the interview, and presents an unacceptable risk that members of the public could misconstrue the interview as endorsing” Cannella’s business.
The letter also said that the SEC is “troubled by the fact that Mr. Kotz’s answers have been edited in a way that excludes important information, including caveats and related points.”
Kotz, in his statement to Bloomberg, said, “I fully support the SEC’s office of general counsel’s efforts to ensure that Mr. Cannella does not continue to improperly use a version of my interview that edits out my caveats and disclaimers.”
Cannella responded to Barton in a letter last week, saying he wouldn’t take the videos down. The SEC is trying to quash “newsworthy interviews that bring light to a dark industry that obviously won’t stop bilking investors,” he wrote.
Cannella also disputed the SEC’s claims that Kotz had a different understanding of the interview or that the video clips were edited in a misleading way. The letter, reviewed by Bloomberg News, included copies of e-mails between Kotz and executives at Cannella’s firm.
The e-mails show that the inspector general was told that Cannella’s show was paid programming and that the videos would be streamed on the Web. The e-mails also included the Sept. 2 message from Kotz asking for the football tickets and saying he was “pleased” with the way the interview came out. The e- mail’s subject line was “groundbreaking interview.”
In his letter to the SEC, Cannella wrote, “I think you know in your heart that all the clips that we have uploaded to our site and elsewhere accurately represent Inspector General Kotz’s assessment of the SEC.”