SEC evidence-destruction scandal: WSJ covering (up)?

by Kurt Schulzke

SEC insider Darcy Flynn has leveled an explosive, apparently well-documented accusation that the nation’s top financial markets cop has been shredding evidence of financial misdeeds since at least 1993. WSJ readers looking for insights will find more beef in Rolling Stone which has, yet again, one-upped The Wall Street Journal via reporter Matt Taibbi.

Since the Darcy Flynn story broke on Wednesday, August 17, WSJ reporters Michael Rothfeld, Jenny Strasburg, Liz Moyer and Jessica Holzer have posted a mere 1,900 words in three ho-hum articles so lacking in informative background and color they’re not worth ink or link.

Meanwhile, in contrast, Taibbi’s thought-provoking 4,900-word Rolling Stone expose, “Is the SEC Covering Up Wall Street Crimes?,” effectively frames one of the SEC’s worst-hidden embarrassments: SEC enforcement lawyers are routinely lured away by corporate targets 0f SEC investigations or their defense counsel. Similarly, targets’ in- or outside counsel are often later hired back into SEC enforcement roles.  In some cases, the conflicts of interest appear clear-cut and ethically questionable.*

For example, according to Taibbi and Flynn, the SEC spiked its 2001 investigation — and later destroyed related evidence — into allegations that Deutsche Bank had defrauded Banker’s Trust shareholders in 2000 by falsely claiming that Deutsche was not then planning to acquire Banker’s.  Just as the SEC investigation was gathering momentum and viewed as a “slam-dunk” by investigators, on July 10,  2001, then SEC enforcement chief Richard Walker suddenly recused himself.  Two weeks later, on July 23, the Division told Deutsche it had “terminated” the “inquiry.”  On October 1, 2001, Walker was hired as Deutsche’s new general counsel.  Case closed? Not.

Later, in 2004, Walker hired one Robert Khuzami away from the DOJ’s SDNY office — where Khuzami was  Chief of that Office’s Securities and Commodities Fraud Task Force — to work for Walker at Deutsche where Khuzami was GC for the Americas when SEC Chair Mary Shapiro snapped him up, in February 2009, to become the SEC’s Director of Enforcement.  Thus, in 2010, when Darcy Flynn decided to blow the whistle on Walker’s Deutsche dance, he blew it to Walker’s protege, Khuzami.  The ins and out and roundabouts make for dizzying reading.

There’s much more to the story, including Flynn’s notes from an August SEC staff meeting called to address the National Archives and Records Administration’s demand for a “report” from the SEC regarding improper destruction of investigative records. Flynn’s notes quote the Enforcement Division’s 30-year-old, “first-ever COO,” Adam Storch as saying:

“There are implications to admit what was destroyed”… It would be “not wise for me to take on the exposure voluntarily. If this leads to something, what rings in my ear is that Barry [Walters, the SEC documents officer] said: This is serious, could lead to criminal liability. . . 18,000 MUIs destroyed, including Madoff.”

Out of the mouth of babes.  So far, Rolling Stone owns this story thanks, apparently, to Taibbi’s productive relationship with Darcy Flynn’s attorney, Gary Aguirre.  For now, the WSJ is AWOL.

While the SEC should be lauded for hiring best-and-brightest minds like Khuzami, the hiring must be done in such a way as to ensure integrity in prosecutorial decision-making.  The revolving door must be closed or, at the very least, slowed.  Shredding evidence of prior investigations should be out of the question.  Until the SEC cleans up rampant actual and apparent conflicts of interest between its lawyers and those on the Street, SEC enforcement will justifiably be treated as a corrupt toy poodle by white-collar wolves too big to be flailed.

* * *

* District of Columbia Bar Rules of Professional Conduct
Rule 1.11 — Successive Government and Private Employment

(a) A lawyer shall not accept other employment in connection with a matter which is the same as, or substantially related to, a matter in which the lawyer participated personally and substantially as a public officer or employee. Such participation includes acting on the merits of a matter in a judicial or other adjudicative capacity.

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