May 12 (Bloomberg) -- Investigations criticizing the Securities and Exchange Commission’s failure to catch the Bernard Madoff and R. Allen Stanford frauds may be thrown into question by allegations of misconduct and conflicts of interest inside the office of the agency’s internal watchdog.
The commission is seeking temporary leadership for the inspector general’s office as the allegations have put the unit into turmoil and sparked inquiries from Congress, people with knowledge of the discussions said.
SEC Chairman Mary Schapiro and Commissioner Daniel Gallagher briefed House and Senate staff members from both parties May 10 about the allegations. The complaint may lead to an inquiry into whether Inspector General H. David Kotz engaged in conduct that could have compromised the integrity and independence of the investigations, according to the people.
The employee who first raised the allegations about Kotz’s conduct, David Weber, has been placed on leave after some of his co-workers said they were bothered by his suggestion that he and others should be able to carry guns on the job, according to the people. Weber, chief investigator in the inspector’s office, has also talked to congressional staff.
Weber’s lawyer, Chris Mead, told Reuters, which reported on his suspension yesterday, that the agency was retaliating against his client for raising the concerns.
Kotz, now a managing director in the Washington office of investigation firm Gryphon Strategies, didn’t respond to an e-mail and phone call seeking comment. Kotz denied Weber’s allegations, Reuters reported May 10.
Earlier this week Schapiro brought Donald Hoerl, the head of the SEC’s Denver office, to Washington with the intention of installing him as acting inspector general while the commission sorted out what to do with the watchdog unit. The SEC backed away from the decision after pressure from some Capitol Hill staff members concerned that Hoerl wouldn’t be independent enough of the commission, the people said.
The commission is now trying to find a retired inspector general or other person who didn’t work at the agency to temporarily run the office, the people said.
Noelle Maloney, the deputy inspector general, has been the acting head of the unit since Kotz’s departure.
The inspector general, while given much leeway to run his office and select his own investigations, ultimately reports to the five-member commission.
The commission is also looking for an outside investigator to review the allegations about Kotz, the people said. One candidate is Washington attorney Michael Bromwich, who is himself a former inspector general and has done similar reviews in the past, the people said.
Some congressional staff members suggested Bromwich could be a problematic choice because he once worked at the same law firm as former SEC Chairman Harvey Pitt, who has emerged as Kotz’s most outspoken critic and once said Kotz led “a reign of terror” at the SEC. Pitt said in an e-mail that he overlapped with Bromwich at Fried, Frank, Harris, Shriver & Jacobson LLP in Washington but they didn’t work together.
The five commissioners have decided that they must have an outside review of the allegations, two of the people said. While Weber first complained in late March to the Council of Inspectors General on Integrity and Efficiency, the group took no action, in part because Kotz is no longer at the SEC, the people said.
SEC spokesman John Nester declined to comment. Weber’s attorney didn’t return calls seeking comment. Hoerl also declined to comment.
Praise from Congress
Kotz left the SEC in January after a contentious four years in the post. He was lauded by lawmakers for his thorough investigations and willingness to hold the SEC accountable for missteps overseeing Wall Street and failing to catch massive Ponzi schemes like those conducted by Madoff and Stanford.
The watchdog was publicly criticized by SEC employees and alumni who said his investigations often lacked evidence of wrongdoing and unfairly damaged some workers’ reputations.
He also drew criticism for an interview he gave Philadelphia-area financial adviser Phillip Cannella III for a paid radio program. Cannella uses Kotz’s remarks to market a “crash proof retirement” to senior citizens and has refused requests by the SEC to take video clips from the interview off his website.
After his meeting with Kotz, Cannella procured three club-level tickets to a sold-out Philadelphia Eagles football game for the watchdog and his children. Kotz reimbursed Cannella $95 apiece, even though the tickets had a value of $240 each.
Kotz has said his investigations helped turn around an ineffective agency that had fallen down on the job. He also said he followed ethics advice in his interactions with Cannella.
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