SEC Purge of Madoff, Goldman Probe Files Upheld by Judge

The U.S. Securities and Exchange Commission doesn’t have to restore purged files on Bernard Madoff and Goldman Sachs Group Inc. that were sought by a government watchdog group, a federal judge ruled.

Citizens for Responsibility and Ethics in Washington sued the agency for allegedly violating federal records law by refusing to recover investigative files that had been destroyed. The group asked for documents related to the agency’s preliminary probes under the Freedom of Information Act.

U.S. District Judge James Boasberg in Washington ruled today that the government was only required to seek recovery of records that were physically removed from the agency’s custody rather than those that were done away with.

“The SEC was under no duty to undertake restoration efforts,” the judge said.

The lawsuit sought records of so-called Matters Under Investigation, which under a policy dating back to 1998 weren’t stored as official files of the SEC, according to a Sept. 14, 2011, letter to Congress from then-SEC enforcement director Robert Khuzami.

CREW, as the group is known, sued for materials related to the SEC’s initial probes of Madoff’s Ponzi scheme, Goldman Sachs’s trades of American International Group Inc. credit-default swaps in 2009, insider-trading probes of Deutsche Bank AG, Lehman Brothers and SAC Capital Advisors LP, and investigations of possible financial fraud at Wells Fargo & Co. and Bank of America Corp. in 2007 and 2008.

Early Stages

The group, according to the lawsuit, wanted to know why those probes were closed at an early stage without any action by the agency.

Darcy Flynn, a 13-year SEC employee, claimed in a letter to U.S. Senator Charles Grassley, an Iowa Republican, that the agency destroyed documents related to those investigations.

“The most troubling aspect of the judge’s opinion is his conclusion that the SEC is under absolutely no obligation to conduct any recovery efforts,” Anne Weismann, chief counsel of the group, said. She said the group was considering whether to appeal.

The group sought recovery of deleted electronic files as well as any physical documents that may still exist elsewhere in the agency.

‘Messy Details’

When the group filed its lawsuit, Weismann said in a statement that “the public deserves to know all the messy details about how these investigations were conducted, and why they were closed at such an early stage without taking any action against the Bernie Madoffs of the world.”

Under the SEC’s policy on closed preliminary investigations, the only information it retained was the title of the matter, its source, general subject matter, the staff members involved, the date it was opened and closed and other parties related to the inquiry, according to the complaint.

In light of Grassley’s questions and continuing discussions with the National Archives and Records Administration, the SEC 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 Khuzami’s letter to Congress.

The case is Citizens for Responsibility and Ethics in Washington v. U.S. Securities and Exchange Commission, 11-cv-01732, U.S. District Court, District of Columbia (Washington).

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