Legal News

Kotz in the Act: SEC Inspector Heaps More Criticism on SEC

By Amir Efrati

Pardon us for belatedly turning our attention to two newsworthy reports released by the SEC’s inspector general last week. The reports follow an IG report released last month that criticized the SEC’s role in the collapse of Bear Stearns, and a fascinating Portfolio magazine article on the decline of the agency’s enforcement division under Christopher Cox, a notion the SEC chairman vigorously disputes.

The Aguirre Report: The IG, H. David Kotz, found that the agency should consider disciplining its director of enforcement, Linda Thomsen (pictured), and two supervisors for their role in handling an insider trading investigation that led to the firing of an SEC lawyer for trying to interview John Mack, currently the CEO of Morgan Stanley. (Click here for the roughly 200-page IG report, here and here for ABC News and NYT stories and here for a 2006 LB post.)

The matter began when Gary Aguirre, an SEC line attorney, said he was fired in 2005 after trying to get testimony from Mack during his investigation of hedge fund Pequot Capital Management, whose founder is a friend of Mack’s. The SEC’s IG, H. David Kotz, said there was “a connection between the decision to terminate Aguirre and his seeking to take Mack’s testimony.”

Kotz criticized Thomsen for providing “relevant information”� about the commission’s evidence against Mack to Morgan Stanley’s counsel, Mary Jo White, telling her there was “smoke” but “no fire” regarding Mack in e-mails the commission had reviewed, even though Thomsen hadn’t consulted first with Aguirre, the front-line investigator. At the time, Morgan Stanley was vetting Mack to be its new CEO.

An SEC spokesman said the IG report had concluded that the Pequot matter had been “aggressively pursued”� and that “the investigation did not find that enforcement cases are generally affected by political decisions or the prominence of defendants.” Through a spokesman, Thomsen declined to comment to the LB.

The Bear Stearns Report: In another Kotz report released last week, he found the SEC, which was criticized for pursuing a hands-off approach at the start of the financial crisis, failed to enforce the securities laws against Bear Stearns after finding that a firm employee inflated the values of certain complex mortgage securities. The SEC’s Miami office drafted a proposal recommending civil penalties against Bear but dropped the case last year, several months before the firm collapsed amid the credit crisis. It was Bear’s disclosure of badly priced mortgage securities in two of its internal funds that helped spark the credit crisis. (Click here for the WSJ story and here for the WSJ story that started the scandal.)

The SEC enforcement staff said the report was “misleading, and all too often relies on speculation and innuendo to support its harsh conclusions.” Sen. Charles Grassley of Iowa (pictured, left), who commissioned the report, said its findings are “another disturbing example of the lack of vigorous enforcement at the SEC.”

Full post as published by Law Blog - WSJ.com on October 13, 2008 (boomark / email).