WASHINGTON (Reuters) - A past practice of destroying certain pre-investigative materials has not harmed any current or future investigations by the Securities and Exchange Commission, the U.S. agency’s enforcement chief said on Wednesday.
The comments from SEC Enforcement Director Robert Khuzami, which were made in a letter to Senator Charles Grassley, mark the strongest defense by the SEC yet after an internal whistle-blower accused the agency of wrongfully destroying important investigative files, including “matters under inquiry,” or MUIs.
“We do not believe that current or future investigations have been harmed by the division’s old MUI retention policy,” said Khuzami, adding that data the agency did save electronically still lets the SEC “connect the dots” between current and closed matters.
Khuzami’s letter to Grassley is the latest twist in an ongoing saga that first began in July 2010 after Darcy Flynn, an agency lawyer, complained that important early-stage investigative records were being improperly discarded.
Flynn took his concerns to the National Archives and Records Administration (NARA), which last month issued a statement declaring that the SEC had indeed destroyed the records without the proper authority. NARA noted, however, that the SEC had stopped destroying the records and was working with NARA on a new records retention policy.
Khuzami’s letter is a response to Grassley, who last month demanded answers from the SEC after learning of Flynn’s allegations about the MUI document destruction. Grassley had said that Flynn told him the records of major high-profile cases including Bernard Madoff, Goldman Sachs, trading in AIG credit-default swaps, alleged frauds at Wells Fargo and Bank of America, and insider-trading probes at Deutsche Bank, Lehman Brothers and the hedge fund SAC Capital.
More recently, a letter to the SEC from Flynn’s attorney, Gary Aguirre, also raised concerns documents from more formal investigations have also been discarded. The SEC has since ceased destroying all investigative records until further notice.
In Khuzami’s letter to Grassley, he downplayed the importance of some of the kinds of documents that may have been discarded.
An MUI is based on “readily available information” including public data, and the threshold for opening one “is low,” he said.
He added the SEC retained “significant information” concerning all MUIs through an electronic records system that dates back 20 years.
Moreover, the records from MUIs that become more formal investigations were retained. Only records from closed matters under inquiry were not stored as official files and in some cases discarded, he said.
Senator Grassley, in a statement late on Wednesday, sounded skeptical about Khuzami’s claims in the letter.
“Since the documents are gone, we’ll never know how important they might have been. How do you know whether you might have been helped by something you no longer have?” he asked. “Federal records are federal records and have to be preserved, regardless of whether they’re part of an ‘investigation’ or an ‘inquiry.’”
Reporting by Sarah N. Lynch; editing by Steve Orlofsky, Phil Berlowitz and Andre Grenon
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