Bloomberg News

Former SEC Watchdog Kotz Violated Ethics Rules, Review Finds

October 06, 2012

The former internal watchdog for the U.S. Securities and Exchange Commission violated ethics rules by overseeing investigations that touched on people with whom he had “personal relationships,” an outside review found.

H. David Kotz, who resigned as the agency’s inspector general in January amid questions about his tactics and conduct, shouldn’t have participated in a probe of the SEC’s office re- organization because he engaged in “extensive” and “flirtatious” communications with an employee associated with the project, according to the review.

Kotz also shouldn’t have opened an investigation related to R. Allen Stanford’s Ponzi scheme because he was friends with a female attorney who represented victims of the fraud, investigators said in the 66-page report.

The outside review of Kotz’s activities was led by David Williams, the inspector general of the U.S. Postal Service. It was requested by the commission after an investigator in the inspector general’s office raised allegations about Kotz’s personal conduct. The report, dated Sept. 17, was released in response to a public records request.

Kotz, who didn’t respond to requests for comment, is a director at Berkeley Research Group, a consulting firm in Washington.

Kotz “appeared to have a conflict of interest” when he opened and supervised an investigation into the court-appointed receiver in the Stanford case because of his relationship with Gaytri Kachroo, a Massachusetts attorney, the review found. One month after beginning the probe, Kotz listed her as a business reference and a “personal friend,” the report noted.

Seeking Business

Kachroo, who declined to be interviewed for the report, said she was one of many who asked Kotz to probe the Stanford receiver.

“My understanding is that the investigation of the Stanford receivership would not have been initiated but for numerous complaints made before ours,” Kachroo said in an e- mail. “The request made by my firm was a formal letter request made on behalf of hundreds of Stanford victims my firm represents, who have no relationship with Mr. Kotz whatsoever.”

In a response included in the report, Kotz said that he met with Kachroo after his departure from the SEC in an effort to “drum up business” for his new job. He indicated that their meeting didn’t result in a close business relationship or additional work for his company.

Madoff Case

The review also called into question Kotz’s work on his most high-profile investigation -- of the SEC’s failure to catch the Bernard Madoff Ponzi scheme -- because of his friendship with the whistleblower in the case, Harry Markopolos.

While investigators were unable to determine when the two became friends, Williams concluded it would have violated U.S. ethics rules if their relationship began before or during Kotz’s probe. Markopolos had tried to flag the Madoff fraud to the SEC, but was rebuffed.

On the office re-organization report, the review found there was no evidence Kotz interfered with his investigators’ conclusions. Still, it noted, Kotz’s “flirtatious communications” with a woman working at the SEC occurred during the investigation.

‘Retail Therapy’

In a July 20, 2008 e-mail included in the review, the woman, whose name was blacked-out in the text, wrote to Kotz that she had “resorted to retail therapy.”

Kotz answered: “Nice, what are you buying? How about a short skirt or two?”

The woman asked in response whether she was exempt from the dress code, to which Kotz replied, “Special exemption for after work get togethers.”

During a Sept. 4 interview with investigators, Kotz denied having any personal, romantic or sexual relationship with the woman. When the e-mails were discussed, Kotz indicated he was simply talking to her the way he would talk to any other employee and that he didn’t believe any of the communications were inappropriate, the report said.

Senator Charles Grassley, an Iowa Republican who has pushed for a strong inspector general at the SEC, said in a statement that the report “reveals poor judgment by several top employees, including the former inspector general himself.”

Still, he said that “the report also found that the integrity of important audit and investigative work conducted by the office was not compromised.”

Probes Questioned

Kotz had a controversial four-year tenure at the SEC. He was lauded by some lawmakers for his thorough investigations and willingness to hold the agency accountable for missteps overseeing Wall Street. Still, the watchdog was publicly criticized by SEC employees and alumni who said some of his probes lacked evidence of wrongdoing and unfairly damaged workers’ reputations.

He also drew criticism for an interview he gave last year to a Philadelphia-area financial adviser, Phillip Cannella III, for a paid radio program. Cannella uses Kotz’s remarks to market a “crash-proof retirement” to senior citizens and has refused requests by the SEC to take video clips from the interview off his website.

After his meeting with Kotz, Cannella procured three club- level tickets to a sold-out Philadelphia Eagles football game for the watchdog and his children. Kotz reimbursed Cannella $95 apiece; the team said the tickets had a value of $240 each.

Kotz has said his investigations helped turn around an ineffective agency that had fallen down on the job. He also said he followed ethics advice in his interactions with Cannella.

The SEC watchdog office is being overseen on a temporary basis by Jon Rymer, the inspector general of the Federal Deposit Insurance Corp.

For Related News and Information:

To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Joshua Gallu in Washington at jgallu@bloomberg.net.

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net.


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