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SEC’s Khuzami Says Document Destruction Hasn’t Hurt Probes

U.S. Securities and Exchange Commission Enforcement Director Robert Khuzami said the agency’s investigations haven’t been harmed by a policy of discarding documents related to initial inquiries.

The SEC maintains electronic records of all so-called Matters Under Investigation going back about 20 years, enabling investigators to draw connections to previous conduct even if it didn’t result in a formal investigation, Khuzami wrote in a letter to U.S. Senator Charles Grassley. Khuzami’s letter, dated today, was a response to the Iowa Republican’s request that SEC Chairman Mary Schapiro respond to a whistleblower’s claim that the agency was illegally destroying documents.

In his letter, Khuzami said the SEC sets a low threshold for opening an MUI in order to encourage enforcement staff to cast a wide net for possible securities violations. During that initial phase of an inquiry, investigators don’t have authority to issue subpoenas or compel subjects of the inquiry to testify or produce non-public documents, Khuzami wrote.

“We do not believe that current or future investigations have been harmed,” Khuzami said, referring to a policy dating back to 1998 that MUI files not be stored as official files of the SEC, according to the letter.

Darcy Flynn

Grassley said last month that his request was prompted by a letter from Darcy Flynn, a 13-year SEC employee who claimed the agency destroyed documents including materials related to Goldman Sachs’ trades of American International Group Inc. credit-default swaps in 2009, insider-trading probes of Deutsche Bank AG, Lehman Brothers Holdings Inc. and SAC Capital Advisors LP, and investigations of possible financial fraud at Wells Fargo & Co. and Bank of America Corp. in 2007 and 2008.

“The SEC’s argument seems to rely on its claim that nothing significant was destroyed,” Grassley said today in an e-mailed statement. “But, since the documents are gone, we’ll never know how important they might have been. How do you know whether you might have been helped by something you no longer have?”

While the agency didn’t retain documents such as publicly available news articles or company filings related to closed MUIs, it kept an electronic record of each matter, including the source of the case, the general subject matter and a list of staff and other parties involved, Khuzami wrote.

In light of Grassley’s questions and the ongoing discussions with the National Archives and Records Administration, the SEC recently halted the policy, requiring all documents created or received for all enforcement matters to be retained until the agency is certain that the policies meet federal standards, according to the letter.

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