Jan. 18 (Bloomberg) -- U.S. Securities and Exchange Commission Inspector General H. David Kotz, whose aggressive style was praised by lawmakers and criticized by current and former agency officials, quit to join a private investigations firm.
During his four-year tenure, Kotz oversaw probes into the agency’s failure to catch Bernard Madoff’s multibillion dollar Ponzi scheme, its lax supervision of Bear Stearns Cos. and the pornography-viewing habits of some employees. He will stay through the end of January before becoming a managing director at Gryphon Strategies in Washington, the SEC said yesterday.
The resignation followed public criticism of Kotz by SEC employees and alumni who said his investigations often lacked evidence of wrongdoing and unfairly damaged some workers’ reputations. Kotz also came under scrutiny for giving an extensive interview to the host of a paid radio show who posted it on a website and uses it in marketing financial services.
Kotz “has served the agency with great distinction,” SEC Chairman Mary Schapiro said in a statement yesterday.
“His work helped us to identify areas where we needed to improve the way we operate, bolster our resources, and upgrade our technology,” she said.
In a statement, Kotz didn’t give a reason for his departure. He didn’t respond to an e-mail from Bloomberg News seeking further comment.
“I am tremendously proud of the accomplishments of my office and the agency over the past four years,” Kotz said in the statement. “While I will miss doing this important work, I am gratified knowing that nearly every aspect of the SEC has been significantly improved in the four years since I was named inspector general.”
According to three people familiar with the matter, agency officials didn’t know Kotz was planning to make an announcement yesterday. As a result, the people said, there has been no discussion about a replacement.
Kotz’s supporters on Capitol Hill, who have praised him as a tough in-house cop who wasn’t afraid to take the agency to task, urged the SEC to hire someone with a similar zealous streak.
“David Kotz produced strong, conclusive reports, even as critics claimed he was too aggressive,” Senator Charles Grassley, an Iowa Republican, said in a statement. “The SEC leaders would be smart to value those qualities and search carefully for candidates who won’t pull punches.”
Kotz’s decision last year to refer former SEC General Counsel David Becker to federal prosecutors for possible criminal ethics violations over his inheritance of family investment profits from Madoff helped spark a backlash against the inspector.
Becker, who worked on an SEC policy related to reimbursing Madoff victims after getting approval from the agency’s ethics counsel, was cleared by the Justice Department in November.
Kotz, according to his reports to Congress, has referred about 30 cases he’s probed to the Justice Department. Those led to two prosecutions, one agreement not to bring charges and one conviction as of September 2011.
Former SEC Chairman Harvey Pitt, in a September e-mail to securities lawyers obtained by Bloomberg News, wrote that Kotz had created “a reign of terror” at the agency. Pitt has represented several people involved in Kotz’s investigations.
Pitt, who participated in the e-mail exchange about Kotz with about 90 other securities lawyers, said the inspector general’s activities put the agency on edge.
“People are afraid to write anything down, make decisions or even take notes of telephone conversations, because the current IG monitors everyone’s e-mails, including the chairman’s, and starts investigations at the drop of a hat,” he wrote.
Kotz’s contacts with Phillip Cannella III, a Philadelphia- area financial adviser who markets a “crash-proof” retirement plan, also have come under review. In late July, Kotz gave Cannella a 75-minute interview at the agency’s Washington headquarters.
After receiving queries from SEC officials about the interview, Kotz asked a council of inspectors general to look into whether he said or did anything improper, according to people with direct knowledge of the matter, who spoke on condition of anonymity because the matter isn’t public.
The SEC has asked Cannella to remove the video clips from his website, saying their use could imply that Kotz or the agency endorsed his business. Cannella has refused.
Last month Kotz confirmed to Bloomberg News that after the interview Cannella got him three club-level tickets for a sold- out football game between the Philadelphia Eagles and New York Giants. The inspector general reimbursed Cannella $95 per ticket, though the Eagles valued them at $240 each.
“All my actions related to Phil Cannella’s radio program were completely vetted and cleared by the SEC ethics counsel,” Kotz said in an e-mailed statement to Bloomberg News in December. “None of my actions were inappropriate or improper and no one at the SEC has ever indicated to me otherwise.”
Kotz asked for the tickets in a Sept. 2 e-mail sent from his SEC account to executives at Cannella’s firm.
“Now that football season is upon us, I wanted to let you know that I spoke with our ethics office who advised me that I was authorized to accept the football tickets as long as I paid the face value,” Kotz wrote, adding that his children “are very excited.”
The Eagles lost, 16-29.
--Editors: Lawrence Roberts, Maura Reynolds
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