On Tuesday, September 20, the SEC’s Inspector General released one of a series of reports expected this month (as discussed here) – this one concerned the involvement of David Becker, the former General Counsel and Senior Policy Director of the Commission, in matters relating to Bernie Madoff. The Inspector General "found that Becker participated personally and substantially in particular matters in which he had a personal financial interest by virtue of his inheritance of the proceeds of his mother’s estate’s Madoff account and that the matters on which he advised could have directly impacted his financial position." The Inspector General is referring the results of the investigation to the Public Integrity Section of the Criminal Division of the United States Department of Justice and Congress has scheduled a hearing this week to look into the matter. A copy of the Report is available here.
According to the Inspector General, Mr. Becker’s father opened an account at Bernard L. Madoff Investment Securities LLC prior to his death in 2000. When his mother died in 2004, the account was transferred to her estate and liquidated for approximately $2 million. Mr. Becker and his brothers were the executors and beneficiaries of the estate. The Trustee administering the Madoff liquidation filed a clawback suit against Mr. Becker and his brothers in February 2011, alleging that approximately $1.5 million of the $2 million constituted "fictitious profits" and should be returned to the fund of customer property for distribution to other Madoff customers.
Mr. Becker, who joined the SEC in February 2009, was aware that the Trustee might commence such a lawsuit. According to the Inspector General, Mr. Becker nevertheless "played a significant and leading role in the determination of what recommendation the staff would make to the Commission regarding the position the SEC would advocate as to the determination of a customer’s net equity," which would be used to determine the amount of funds that the Trustee would seek to clawback in the Liquidation.
Remarkably, the Inspector General found that seven SEC officials including Chairman Mary Schapiro and now General Counsel Mark Cahn were informed of the existence of this account, yet "none of these individuals recognized a conflict or took any action to suggest that [Mr.] Becker consider recusing himself from the Madoff Liquidation."
In addition, the Inspector General concluded that while General Counsel and Senior Policy Director, Mr. Becker "provided comments on a proposed amendment to [the Securities Investor Protection Act of 1970] that would have severely curtailed the Trustee’s power to bring clawback suits against individuals like him in the Madoff Liquidation."
SEC Chairman Schapiro said in a statement that she takes the report "very seriously," but noted that it "would be inappropriate for [her] to comment on the Inspector General’s referral to the Department of Justice."
The SEC is also awaiting reports from the Inspector General regarding other subjects, including the destruction of documents relating to certain investigations, the alleged "revolving door" between SEC staff members and Wall Street firms, the compensation offered Henry Hu to join the Commission’s staff, and the Commission’s handling of its case against Mark Cuban.
As discussed here, in Congressional testimony, former SEC Chairman Harvey Pitt has criticized the Inspector General’s work, stating that he had has taken an "unprincipled approach" in his investigations. Nevertheless, Congress appears to be interested in the Inspector General’s investigation. According to the Securities Law Prof Blog (here), on September 22, 2011, the House Financial Services Committee and the Committee on Oversight and Government Reform will hold a hearing on this Becker matter, where Chairman Schapiro, the Inspector General and Mr. Becker are expected to testify.