Cover-up at the SEC?

A whistleblower’s disturbing tale of corruption and concealment

Mary Schapiro may have left the SEC last month, but she now faces a potentially ruinous blot on her legacy at the agency she chaired for more than four years.
Shredded Papaer Background

Schapiro and the SEC are defendants in a lawsuit recently brought by a former SEC attorney named David Weber who claims he was defamed and wrongfully terminated in retaliation for exposing allegedly serious and pervasive misconduct at the agency, which was covered-up and whitewashed by Chairman Schapiro and her senior staff.

Weber was hired by the SEC in January of last year to serve as its Assistant Inspector General for Investigations, responsible for uncovering fraud, waste and abuse in SEC programs and operations. He had previously served in similar capacities at the FDIC and Office of the Controller of the Currency and had over 17 years of federal government experience.

But Weber’s stint at the SEC lasted just 10 months. His lawsuit claims that he was retaliated against by the SEC for blowing the whistle on several occurrences of senior staff misconduct to the SEC’s Commissioners. When the Commissioners failed to act on his allegations, Weber brought his charges to the staff of the Congressional committee that oversees the SEC. In May of last year, Weber was put on administrative leave; in October, he was terminated.

During his very first week as AIG, Weber discovered that his boss, David Kotz, the SEC’s Inspector General, had engaged in misconduct that compromised the integrity of several internal SEC investigations, including inquiries into its mishandling of the Bernie Madoff and Allen Stanford Ponzi schemes. Although details of Kotz’s indiscretions were not laid out in Weber’s complaint, they were apparently of a sexual nature and involved, among others, his deputy IG at the SEC and an attorney who represented investors in Allen Stanford’s certificates of deposit.

Less than two weeks after Weber joined the agency and initiated his investigation into the allegations against Kotz, Kotz resigned his position and was replaced by the deputy IG with whom he had reportedly been intimate. Kotz had been IG at the SEC since 2007.

According to Weber, the SEC’s Chief of Security Services, who was responsible for the physical security of the agency’s DC headquarters, regularly hired staff and contractors for the agency from among friends, family and those with whom he had financial or other ties (including sexual liaisons), which clearly violated the SEC’s merit system. That same official also improperly sole-sourced SEC threat assessments to a friend’s investigative services firm and failed to conduct background checks on as many as 100 security personnel, including some who had access to confidential SEC investigative records.

Weber’s complaint also charges that the SEC’s Chief Operating Officer favored a friend of his at Booz Allen Hamilton over three other management consulting firms that had been hired to implement organizational reforms at the SEC in the wake of its failure to detect Bernie Madoff’s massive investment fraud. The COO allegedly gave Booz Allen a disproportionate share of the implementation work for which it earned $8.5 million.

For Weber, the SEC’s most dangerous malfunction was uncovered in its Division of Trading and Markets. Apparently, in August 2011, several examiners in that Division attended the annual ‘Black Hat’ conference in Las Vegas, where computer hackers and security experts discuss potential vulnerabilities in network infrastructure. According to Weber, the SEC staff who attended that conference had recently tested the computer systems of the NYSE, NASDAQ and other major exchanges for weaknesses in their network architectures and trading engines. The SEC laptops they brought to the conference, however, were not wiped clean after the testing program, contained all the examination data from the exchanges and were not virus-protected, encrypted or equipped with firewalls. The laptops were also registered at the conference as belonging to SEC personnel.

In the wrong hands, Weber claims that knowledge of potential computer infrastructure vulnerabilities could be used to disrupt trading activities on all of the major exchanges, either one at a time or collectively. The SEC became aware of the oversight, but failed to notify the exchanges of the potential security breach so that they could take steps to protect themselves.

Who knows how much of what David Weber claims is true or whether he was a trouble-maker at the SEC from the start and is now trying to shake the government down for $40 million via a whistleblower retaliation and defamation lawsuit?

Who knows how much of what David Weber claims is true or whether he was a trouble-maker at the SEC from the start and is now trying to shake the government down for $40 million via a whistleblower retaliation and defamation lawsuit? Decidedly in his favor, however, is the fact that his contentions were, by and large, vindicated by a US Postal Service investigation conducted after he was suspended which, among other things, concluded that David Kotz appeared to have violated SEC ethical standards in several internal investigations, including those involving Bernie Madoff and Allen Stanford. The probe also found that senior SEC staff were aware of Kotz’s indiscretions and did not escalate them to appropriate SEC management or Congressional authorities.

Weber claims that Chairman Schapiro knew about all of these shenanigans and never lifted a finger to redress them. She also allegedly countenanced his suspension and firing. If he’s right about those charges as well, then Mary Schapiro presided over an organization that was just as deeply flawed as the disgraced victims of her celebrated enforcement efforts.

Talk about ‘tone at the top’.

  • fedupwithnobels

    what do you expect from this misadministration?

    • ImplodingGOP

      Are you really that stupid that you think that the Stanford and Madoff cases, and the SEC’s bungling of them, started during this administration? Just another idiotic comment from a sore loser who can’t handle having a Black man in office, so everything’s his fault. Get a life.

      • fedupwithnobels

        I wasn’t talking about the long-standing incompetence of the SEC — that is well known. I was talking about the general incompetence of Chairman Obama and his minions.

  • Mark Melin

    And why doesn’t the media report this??? Oh, that’s right. Like MF Global criminality, real reporting of the SEC on the “do not report” list alongside the “do not prosecute” list.