Bloomberg News

SEC Sued Over 1998 Policy of Purging Files Linked to Probes

September 28, 2011

Sept. 28 (Bloomberg) -- The U.S. Securities and Exchange Commission was accused in a lawsuit by a government watchdog of illegally destroying documents from probes of Bernard Madoff, Bank of America Corp. and Lehman Brothers Holdings Inc.

Citizens for Responsibility and Ethics in Washington yesterday asked a federal judge in Washington to order the commission and its chairman, Mary Schapiro, to preserve investigative records and attempt to recover files that were destroyed.

“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,” Anne Weismann, the group’s chief counsel, said in a statement.

The SEC’s data policy came under scrutiny after Darcy Flynn, a 13-year SEC employee, claimed in a letter to U.S. Senator Charles Grassley that the agency destroyed documents including materials related to Goldman Sachs’ 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 in 2007 and 2008.

John Nester, an SEC spokesman, declined to comment on the suit.

Preservation of Records

The lawsuit seeks preservation of records of so-called Matters Under Investigation, which under a policy dating back to 1998, aren’t stored as official files of the SEC, according to a Sept. 14 letter to Grassley from SEC Enforcement Director Robert Khuzami.

While the agency didn’t retain documents such as publicly available news articles or company filings related to closed preliminary investigations, it kept an electronic record of each matter, including the source of the case, the general subject matter and a list of staff and other parties involved, Khuzami wrote.

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.

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).

--With assistance from Josh Gallu in Washington. Editors: Fred Strasser, Peter Blumberg

To contact the reporter on this story: Tom Schoenberg in Washington at

To contact the editor responsible for this story: Michael Hytha at

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