Exclusive: SEC wasted $1 million on data storage, watchdog says

The headquarters of the U.S. Securities and Exchange Commission (SEC) are seen in Washington, July 6, 2009.

WASHINGTON (Reuters) -The Securities and Exchange Commission wasted $1 million on virtual data storage it bought in 2008, the agency's internal watchdog said, part of a series of investigations into the agency's procurement practices.

SEC Inspector General David Kotz is also expected to unveil soon the findings of a probe into the SEC's leasing process, after the agency was forced to renege on a plan to rent 900,000 square feet of office space because it failed to secure additional funding from Congress.

The findings could provide ammunition to some Republican lawmakers seeking to deny extra money for the SEC in an effort to starve regulators of funding to implement the Dodd-Frank financial overhaul law.

The SEC has asked Congress to boost its budget by $222 million, or 16 percent, to $1.407 billion for fiscal 2012 that begins Oct 1.

In the December report, Kotz investigated the SEC's acquisition of data storage technology, which included items from Apple Inc. and virtual storage provided by a firm called Cloverleaf Communications, later acquired in 2010 by Dot Hill Systems.

The report, dated December 14, 2010, was obtained by Reuters through a Freedom of Information Act request.

Kotz uncovered numerous problems, from the equipment itself to the procurement process, which occurred in the summer of 2008, before Mary Schapiro became chairman of the SEC.

According to the investigation, an Apple salesman convinced the agency that Cloverleaf could provide a cheaper solution to the agency's data storage and backup woes.

Although there were other companies that offered similar products, Kotz said the SEC violated federal contracting procedures by securing a no-bid contract with Cloverleaf, a company with which the SEC had no experience. Kotz said the contract actually proved "to be more expensive than other, better-known and less risky alternatives."

He also found the SEC improperly shared budget information with Apple and went ahead with purchases before getting proper approval and before performing reviews.

In a statement, SEC spokesman John Nester said the agency agrees with Kotz's findings and is "taking steps to improve our policies and controls over purchases of information technology solutions, including pre-purchase review by management's technology and business oversight committees."

Representatives of Dot Hill and Apple did not respond to requests for comment.

The SEC was later beset with problems when it tried to actually use the equipment, Kotz said, adding that "bugs" in the installation were not worked out and the project "quickly went downhill from there."

Later, when some SEC staff sought to bring the problems to the attention of a supervisor, staff told Kotz the supervisor told them "this information doesn't leave this room" and then got up and left the room.

(Reporting by Sarah N. Lynch; Editing by Tim Dobbyn)