The U.S. Securities and Exchange Commission’s inspector general plans to ask the Justice Department to review whether the agency’s former top lawyer violated conflict-of-interest laws, according to three people with knowledge of the watchdog’s findings.
H. David Kotz, the inspector, is completing his report on ex-general counsel David Becker’s possible conflicts and it is expected to be released next week, said the people, who spoke on condition of anonymity because the matter isn’t public. Kotz and congressional investigators have been probing why Becker was allowed to work on SEC policies related to the Bernard Madoff fraud after inheriting profits from the Ponzi scheme.
Kotz opened his probe after Becker and his brothers were sued by the court-appointed trustee in the Madoff bankruptcy case to recover $1.5 million in what he termed fictitious profits. When he joined the agency in 2009, Becker told Chairman Mary Schapiro and William Lenox, then the agency’s ethics counsel, about his family’s Madoff investment. Lenox told Becker in May 2009 that he didn’t have a financial conflict of interest and could work on the matter.
Becker, who left the SEC in February, declined to comment today, as did SEC spokesman John Nester.
As general counsel, Becker advocated that Madoff victims be compensated for losses from an SEC-overseen insurance fund using a formula that adjusted for inflation. The argument, which hasn’t been adopted by the trustee, could have made it less likely that the trustee would seek to reclaim profits from Becker.
In a letter to lawmakers in March, Becker said he was “confident that any fair review of my actions” will show he worked in the best interests of investors and the SEC. Schapiro told a House panel earlier this year that she wished Becker had recused himself.
Stephen Gillers, a professor at New York University School of Law who specializes in legal ethics, said any criminal case would be difficult to make because Becker did what he was supposed to do: he raised the issue and obtained clearance from the ethics officer.
“I can’t see this as a criminal prosecution,” Gillers said. “We can question the judgment of everyone involved, but lapses in judgment are not a crime.”
Gillers said that any “fault here has to be laid at the door of the ethics counsel” whose advice was “sketchy” and “pretty aggressive.”
Former SEC Chairman Harvey Pitt, who is representing Lenox in the matter, defended his actions.
“Mr. Lenox had handled issues exactly like this one for 18 years, and his advice was thoughtful, correct and has been mischaracterized repeatedly by those who have spoken out about it without being encumbered by any information about what transpired,” Pitt said.
Kotz has referred other matters to criminal authorities, including allegations that SEC officials backdated leasing documents to hide a missed deadline and that two employees engaged in insider trading. The Justice Department doesn’t necessarily have to open a case based on the referral.
Representative Darrell Issa, a California Republican who is chairman of the Oversight and Government Reform Committee, and Representative Randy Neugebauer, a Texas Republican who heads a Financial Services subcommittee on investigations, have spearheaded a congressional review of the matter. Neugebauer’s panel and an Oversight subcommittee have scheduled a joint hearing for Sept. 22 to coincide with the expected release of Kotz’s report.
Becker, 64, worked as a clerk for former U.S. Supreme Court Justice Stanley Reed after graduating from Columbia University School of Law, where he was editor-in-chief of the law review. He was the SEC’s general counsel from 1999 to 2002 before rejoining the agency in 2009. After leaving the SEC in February, he returned to law firm Cleary Gottlieb Steen & Hamilton LLP as a partner.