Report Takes Former SEC Inspector General to Task for Allegedly Inappropriate Friendships

Updated 4:33 p.m., 10/9/12

In a June 2011 National Law Journal profile of former Securities and Exchange Commission Inspector General H. David Kotz, Bernard Madoff Ponzi scheme whistleblower Harry Markopolos spoke glowingly about Kotz.

"When he got to [the SEC], it was a mess," Markopolos said. "It's a totally different agency now, in large part because of his efforts. I had lost my faith in government. But he was unflagging. Nothing deterred him or his team. He restored my faith."

Now, the U.S. Postal Service Office of the Inspector General has alleged that the two men were "very good" friends -- and that the friendship may been inappropriate, depending on when it began.

The Postal Service IG report, recently obtained by Reuters through a Freedom of Information Act request, claimed Kotz had engaged in several conflicts of interest while serving as the top SEC internal watchdog.

The September 17 report does not identify specific examples within any of Kotz's reports that might be tainted. Kotz announced he was leaving the agency in January.

According to a Reuters account based on the report, investigators said that Kotz should have excused himself from the investigation about Ponzi scheme financier R. Allen Stanford because Kotz was friends with a female attorney who represented the victims. It also details that Kotz should also have excused himself from the SEC's re-organization because he used "flirtatious" communication with an employee working on the project.

Known for his 477-page report on the agency's failure to detect the Madoff scheme, Kotz is currently a director with Berkeley Research Group. He had a reputation as an aggressive watchdog at the SEC.

According to the Reuters account, David Weber, the chief investigator in the SEC's inspector general's office, was the official who had accused Kotz of wrongdoing.

Weber was placed on leave in May after allegations surfaced that he had spoken about wanting to carry a concealed weapon and had created a hostile work environment. But the Postal Service report found no wrongdoing on Weber's part.

"The evidence provided during employee interviews with Postal Service OIG investigators did not substantiate allegations that Weber created a hostile work environment or displayed threatening behavior within the workplace," the report said.

Weber could not be reached for comment, but his attorney, Cary Hansel III, a shareholder at Joseph, Greenwald & Laake, called for his client to be reinstated to his job. "Now that he has been cleared by two polygraph examinations, an SEC-commissioned private investigation, and by the USPS OIG, we call on the agency to publicly disavow the allegations and return David Weber to work," Hansel said in a written statement.

Kotz could not be reached for comment. Likewise, officials at the Postal Service inspector general's office also could not be reached.

Markopolos could be reached — and in an interview, he took a dim view of the Postal Service report. (The report said that if the friendship between Kotz and Markopolos began before or during the SEC inspector general's review of Madoff, it would have been inappropriate.)

First of all, Markopolos said he hadn't even been contacted by the Postal Service inspector general as the office was researching and writing its report.

"The Postal service IG never called me as part of the investigation, which tells you about the quality of the work of the postal service IG," Markopolos said. "I read the press reports on this and I ask why they stabbed this guy in the back on the way out."

Markopolos said that his relationship with Kotz was purely professional and that he had no idea about the substance of Kotz's Madoff report prior to its publication.

"Why would I become friends with somebody before the report was issued?" Markopolos said. "Now it's a different agency. I would argue that it's a much improved agency than it was four years ago."

Note: Legal Times obtained a copy of the Postal Service IG report after our original item was posted.

Comments

[Yossarian]

It's standard practice to bring in investigators from another agency when an IG (or possibly even another OIG senior official has been accused of misconduct).

What bothers me about this is the way the investigators seemed to go out of their way to attack Kotz for things that seemed fairly trivial. I mean, did they really expect Kotz to tell his deputy, "I've flirted with a girl who works in that organization, so you'll have to handle any investigations of that organization." Really?

The other two findings are similarly weak. Was Kotz really supposed to give Madoff a pass because he was friends with the lawyer of one of the victim? It's nuts.

I know why people in SEC hated Kotz. He did what he was supposed to do--provide independent oversight.

What I can't figure out is why the USPS OIG report tags Kotz for so many penny ante alleged misjudgments. Maybe they think it's a good idea to have a finding on every allegation where an IG is concerned, no matter how trivial. Whatever the rationale, the wisdom and fairness of the USPS OIG approach is dubious.

[Pancho]

I'm confused. Why should the IG from the Postal Service be investigating this?