WASHINGTON (Reuters) - The new internal watchdog at the U.S. Securities and Exchange Commission has pledged future investigations will be thorough and credible after the agency was accused of mishandling an insider trading case that included a failed effort by one staffer to subpoena a powerful Wall Street figure.
SEC Inspector General David Kotz said he was working “diligently to restore confidence in the Office of the Inspector General at the SEC” in a February 13 letter addressed to Iowa Sen. Charles Grassley, the top Republican on the Senate Finance Committee.
A copy of the letter was provided by Grassley’s office on Wednesday.
The SEC inspector general is responsible for conducting independent audits, investigations and inspections to detect agency abuse and fraud, as well as promote efficiency.
Grassley and Pennsylvania Sen. Arlen Specter, the top Republican on the Senate Judiciary Committee, had accused the SEC of mishandling the 2005 dismissal of an agency investigator.
The former employee, Gary Aguirre, said he was fired after an insider trading probe got too close to a powerful Wall Street banker.
Aguirre led an insider trading probe involving hedge fund Pequot Capital. Aguirre said he wanted to subpoena John Mack, who is now the chief executive of Morgan Stanley MS.N, as part of the probe, but was stopped by supervisors because of Mack's political clout.
In an August report, the Senate Finance and Judiciary committees said the SEC’s office of inspector general, then headed by Walter Stachnik, failed to conduct a serious, credible investigation of Aguirre’s claims.
The report criticized the office for not contacting Aguirre and interviewing his supervisors informally on the phone and accepting their statements at face-value. It also said the office closed the case without obtaining key evidence.
Kotz, who was named inspector general in December, outlined reforms he said are already being implemented and is reinvestigating the Aguirre case.
A final report is expected by May 2008, pending the receipt of materials and transcripts from the first investigation.
“I am putting into place a series of reforms in my office to ensure independence from SEC management and make certain that all investigations conducted by this office are thorough, fair and credible as recommended by the Senate report,” said the letter.
The measures include making sure that in all new investigations, the person complaining will be interviewed first and on the record, whenever feasible. Investigators will also promise confidentiality to potential witnesses who are reluctant to come forward in an official investigation.
In addition to changes in the inspector general’s office, Kotz said the SEC has started adopting congressional recommendations to make sure that Wall Street’s elite do not use their power to interfere with investigations.
The committees’ August report called for standardizing investigative procedures and requiring supervisors to keep complete and reliable records of all outside communications involving investigations.
Grassley said he was encouraged by Kotz’s letter. “I’ll be keeping close tabs on the progress made toward reaching these goals that are so important to public confidence in those overseeing the integrity of our markets,” the senator said in an e-mailed statement.
Reporting by Rachelle Younglai; Editing by Tim Dobbyn
Our Standards: The Thomson Reuters Trust Principles.