SEC watchdog: Becoming political appointee would jeopardize White House probe

Timing of SEC Case Against Goldman Sachs Under Investigation

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The Securities and Exchange Commission’s independent watchdog says a Congressional effort to convert his position into a presidential appointment would jeopardize an ongoing investigation into whether the White House and Democratic Party improperly influenced a high-profile enforcement case.

“If I were to be an inspector general that was appointed by the president and cleared by the White House, it might be difficult to convince the public that I could conduct an independent or credible investigation into alleged improper connections between outside forces, including the White House, and the SEC,” SEC Inspector General David Kotz said in an interview with the Center for Public Integrity.

If the legislation were to be enacted, “immediately I become a lame duck,” Kotz said. “And that could have a significant impact on our ongoing investigations,” he said.

SEC Inspector General David Kotz announced late last month that he had opened an investigation into allegations from Republicans in Congress that Democrats sought to manipulate or interfere with the filing or timing of the agency’s recent enforcement case against Wall Street giant Goldman Sachs Group Inc.

As his investigation ramps up, senators are debating Democratic-sponsored financial reform legislation that would, among other things, change the status of Kotz’s job and those of four other financial agency inspectors general.

There are 69 inspectors general across the executive branch whose job it is to independently police against waste, fraud, abuse and ethical violations inside their agencies. Some, especially those at Cabinet agencies, are presidentially appointed and confirmed by the Senate. Many others are hired independently by their agencies.

Currently the watchdogs at the SEC, Pension Benefit Guaranty Corp., Commodities Futures Trading Commission, National Credit Union Administration and Federal Reserve Board are hired independently because Congress has not previously included them in the political appointment system.

But a provision in the financial markets reform legislation passed by the House last December — and being debated in the Senate — would remove those IGs in favor of political appointees.

The five watchdogs have sent a letter to Senate banking committee chairman Christopher Dodd, D-Conn., asking that the provision be pulled. They argue it would jeopardize the investigative independence they’ve enjoyed for years.

“I don’t believe having someone presidentially or politically appointed, having an IG go through the White House, makes that IG more independent,” Kotz told the Center in the interview Friday. “In fact, there are concerns one’s independence could be adversely affected if he was turned into a presidential appointee.”

Sen. Charles Grassley, R-Iowa, a longtime champion of the inspector general community, is trying to win support for an amendment to the financial reform legislation that would protect the five watchdogs. The amendment would keep all independently hired IGs across government — including the five financial watchdogs — in their current status without having to undergo presidential appointment.

The amendment also seeks to augment the independence of these IGs by requiring them to report to the entire bi-partisan board or commission that heads the agency. In addition, the amendment would permit them to be removed “for cause” only by a two-thirds majority vote of the board or commission. To ensure the watchdogs’ own accountability, the Grassley measure further requires them to undergo a peer review of their own performance and to publish those results once a year. Kotz said he supports the Grassley amendment.

The White House does not support changing the status of the inspectors general to political appointees, an administration official told the Center. “The administration does not support in any way politicizing the function of the Inspector General and we have not proposed these changes,” said the official, who spoke only on condition of anonymity because talks between Congress and the White House are ongoing.

The effort to make the five financial oversight IGs political appointees has been led by Rep. John Larson, D-Conn., who has reasoned that presidential appointments would make the watchdogs more independent, not less. Larson has been concerned the watchdogs faced a conflict of interest in reporting to the very officials in their agencies they were most likely to investigate.

“One of the legacies of the financial meltdown was that regulators weren’t doing their jobs. And Congressman Larson was concerned that the IGs weren’t holding those regulators accountable for not doing their jobs. So we believe making them politically appointed will give them the independence to do the sort of hard-hitting investigations that were lacking for so many years during the Bush administration,” Larson’s office said in a statement Monday.

The Center reported last week that as many as 15 watchdog jobs across the executive branch and government are vacant, some for as long as a year or two.

Kotz said if the financial reform legislation was to be enacted, his position could remain in a lame-duck status for months or longer, further hurting the office’s ability to conduct strong oversight.

Kotz has conducted some of the highest profile internal investigations of federal employees in recent years. His work includes probes that found SEC regulators surfed pornography sites from their government computers, missed 12 years of opportunities to uncover an alleged Ponzi scheme by R. Allen Stanford and failed to prevent the fleecing of Bernard Madoff’s investors.

His latest high-profile inquiry is examining whether the White House and Democratic Party applied any pressure or coordinated the SEC’s announcement of civil charges against Goldman Sachs.

Citing circumstantial evidence, Rep. Darrell Issa, R-Calif., top Republican on the House Oversight and Government Reform Committee, and seven of his GOP colleagues alleged in a letter to Kotz last month that the SEC action may have been coordinated with the White House and Democratic Party to improve the political chances of financial reform legislation passing in the Senate.

“We have opened an investigation into the serious allegations that you describe in your letter,” Kotz wrote Issa late last month.

Kotz noted late last week that the investigation is ongoing, but said he could not discuss any details.

The White House, the SEC and Democratic leaders in Congress have all denied Issa’s allegations. The White House has not received a request for information from the SEC inspector general in connection with the probe, an official said.

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