Did Sex Influence SEC Investigations?

Chidem Kurdas

It sounds like the former chief of the Securities and Exchange Commission watchdog office had an affair with every woman who came within reach. David Kotz is said to have consorted with, among others, his number two at the SEC Office of the Inspector General and an attorney who represents victims of Allen Stanford’s Ponzi scheme.

According to David Weber, this tainted the investigations led by Mr. Kotz, notably those into the SEC’s failure to stop the Stanford and Bernard Madoff schemes.

Mr. Weber headed  investigations at the office until a month ago when he was fired. He  is suing the SEC and chairperson Mary Schapiro for $20 million or multiples thereof. She announced her own exit from the agency yesterday. Funny she decided to spend time with her family as Mr. Weber’s complaints escalated. The lawsuit includes a section on his investigating accusations that she committed perjury while testifying to Congress.

Regarding Mr. Kotz and his numerous paramours, affairs that had no effect on how he did the job are his own business. But Mr. Weber alleges that Mr. Kotz compromised the integrity of investigations. So, there’s the comely lawyer representing a group of Stanford victims. She files a complaint with the SEC about the government-appointed receiver in charge of the estate in that case. Before you know it, she and Mr. Kotz are exchanging ardent emails while he’s investigating the receiver.

Mr. Kotz left the SEC early this year when rumors surfaced of his affairs. His number two, another love interest, became acting inspector general. Mr. Weber took over the investigation and found that the SEC violated its own rules in how it picked the Stanford receiver but no wrongdoing by the receiver himself.

Then the acting inspector general him told him that the lawyer whose complaint led to the investigation had a relationship with Mr. Kotz and “received special treatment.” Moreover, she “noted that Kotz had other sexual affairs in other investigations.”

I have to say that the reports from the SEC inspector general, in particular those on Stanford and Madoff, look solid and hard-hitting. It does not seem that Mr. Kotz compromised the quality of the major investigations. He was aggressive in looking into SEC debacles. If anything, this scandal may unfortunately weaken the office of the inspector general.

However, perhaps Mr. Kotz went easy in some matters. His office investigated allegations of waste in what the SEC called its “restacking project,” in which the agency spent $4 million dollars to relocate the desks of some employees—yes, that’s correct, to move desks. According to his former squeeze, he also had an affair with one of the key SEC staffers involved in this project. Maybe he pulled his punches in the investigation—though I see no evidence of that.

In any event, the government rewards bureaucratic mischief. Thus the Dodd-Frank Act endowed this agency of virtue with immense new powers. If the bureaucrats are corrupt now, the Obama administration and Congress gave them  the wherewithal to be many times as corrupt in the future.

In the meanwhile, the place appears to be emptying out. Mr. Kotz and Ms. Schapiro are gone. If Mr. Weber’s various charges of corruption are at least partially true, a sizable group of officials from the chief operating officer to the head of security to IT specialists may be leaving to spend time with their family.

You know what, there’s an easy way to get a skilled person. Bring Uncle Bernie out of his cell and employ him to tamp down on financial fraud. He’s no more cynical than career regulators, might do something useful and would be cheaper. And he’s sown his wild oats.

For more on Sex, Lies and Rock ‘n’ Roll at the SEC, click for the Rolling Stone.

 

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Tags: Allen Stanford, Bernard Madoff, corruption, sex scandal