From the October 01, 2011 issue of Futures Magazine • Subscribe!

Did SEC destroy evidence?

Bad watchdog!

At a time when the Securities and Exchange Commission’s (SEC) reputation already is in question, Darcy Flynn, an SEC attorney, has stepped forward as a federal whistle-blower alleging that the SEC has destroyed countless documents related to preliminary investigations. According to Flynn, the SEC has been destroying records of preliminary investigations that did not receive approval for full investigations since at least 1993.

Before the SEC even looks into alleged wrongdoings, a preliminary investigation, or MUI (Matter Under Investigation), is opened to collect evidence. If enough evidence is found to justify a formal investigation, the SEC takes the next step. If not, though, Flynn says the SEC has been destroying all evidence collected during the MUI instead of archiving it.

Andrew Stoltmann, securities lawyer at Stoltmann Law Offices, says that at a minimum, the SEC’s actions hampered future investigations. "From an investigatory standpoint, putting together unrelated pieces of information often is the key in spotting the next Bernie Madoff. By destroying these documents going back to the early ’90s, we have no idea how many scams were missed," he says.

Flynn claims the SEC has destroyed more than 9,000 documents on inquiries into securities law violations, including investigations at several Wall Street banks since 1993.

Since Flynn stepped forward, SEC General Counsel Mark Cahn sent a memo to SEC staff members ordering them to stop disposing of documents from closed cases until further notice. According to an SEC spokesman, the SEC has not developed new policies but is working with Sen. Charles Grassley (R., Iowa), a member of the Senate Committee on Finance.

The SEC inspector general also is investigating the allegations and is scheduled to release his report in September.

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