UPDATE1-Senator Grassley probes document destruction at SEC

Wed Aug 17, 2011 5:25pm EDT

* Grassley asks SEC to explain document destruction

* Grassley: SEC whistleblower came forward about records

* Whistleblower says records pertained to investigations

* Says records related to Madoff, Goldman Sachs probes (Updates to add an SEC quote from spokesman John Nester)

By Sarah N. Lynch

WASHINGTON, Aug 17 (Reuters) - A U.S. senator is asking securities regulators for answers after an internal whistleblower alleged the Securities and Exchange Commission has destroyed over 9,000 investigation-related records.

Senator Charles Grassley, the ranking Republican on the Judiciary Committee, sent a letter on Wednesday asking SEC Chairman Mary Schapiro about the alleged destruction of so-called "matters under inquiry." MUIs are preliminary documents the SEC compiles when it receives evidence of possible securities violations.

In his letter, Grassley says that Darcy Flynn, a 13-year veteran of the SEC, had alerted him to the problem.

Flynn told Grassley the SEC has destroyed files on important, high-profile cases including Bernard Madoff, Goldman Sachs (GS.N) trading in AIG (AIG.N) credit-default swaps, alleged frauds at Wells Fargo (WFC.N) and Bank of America (BAC.N), and insider-trading probes at Deutsche Bank (DBKGn.DE), Lehman Brothers and the hedge fund SAC Capital.

"From what I've seen, it looks as if the SEC might have sanctioned some level of case-related document destruction," Grassley said in a statement.

"It doesn't make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what timeframe, and to what extent its actions were consistent with the law."

SEC spokesman John Nester said that the agency does retain records of its matters under inquiry, but noted that "not every document that comes into an agency's possession in the course of its work must be retained." He declined to comment further in advance of the SEC's response to Grassley.

In his letter, Grassley asks the SEC to discuss whether it routinely destroys documents and what its legal obligations are to retain certain records.

He asked to receive the information by the end of the month.

(Reporting by Sarah N. Lynch, editing by Bernard Orr)

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