On Thursday, the SEC’s Inspector General David Kotz, Former General Counsel David Becker and Chairman Mary Schapiro testified before a joint session of two House Subcommittees regarding the recent report by the Inspector General regarding the involvement of Mr. Becker in matters relating to Bernie Madoff. As previously discussed here, on September 20, the Inspector General released a report ("OIG Report") finding that Mr. 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 referred the results of the investigation to the Public Integrity Section of the Criminal Division of the United States Department of Justice.
Thursday’s testimony of Mr. Becker, Chairman Schapiro and Inspector General Kotz was before the Subcommittee on Oversight and Investigations of the U.S. House of Representatives Committee on Financial Services and the Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs of the U.S. House of Representatives Committee on Oversight and Government Reform.
Inspector General Kotz (whose testimony is available here) reiterated the findings in the OIG Report and stated that he appreciated the interest of the Subcommittees. He expressed his belief that "the Subcommittees’ and Congress’s continued involvement with the SEC is helpful to strengthen the accountability and effectiveness of the Commission."
In his testimony (available here), Mr. Becker emphasized that he sought and followed the advice of the SEC Ethics office (a fact acknowledged by the OIG Report) and "was advised that [he] had no conflict of interest in providing legal advice to the SEC about the interpretation of the legal standard in the Securities Investment Protection Act … that governed the net equity claims of holders of [Madoff] securities accounts." He further detailed that asked for and received legal advice from the SEC’s Ethics Office before working on these issues.
The account at issue was opened by Mr. Becker’s father at Bernard L. Madoff Investment Securities LLC prior to his death in 2000 and ultimately transferred to estate of his mother when she died in 2004 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.
With respect to this account, Mr. Becker testified:
I was aware of the possibility that the Madoff Trustee might try to "claw back" from me any funds that could be traced to my late mother’s account, though as the OIG’s report confirms, I regarded that possibility as unlikely. … The clawback action that the Madoff Trustee instituted against me and my brothers in February 2011 makes no allegation of wrongdoing by me or my brothers, nor could it. …
One reason I did not think much about clawback actions is that they were really beside the point to me. I was confident that the Trustee would never find it necessary to sue me. If it turned out that there were indeed fictitious profits in my mother’s account, all the Trustee had to do was notify me and explain his calculations, and I would return any excess funds in my possession. …
I have been asked why I did not contact the Trustee, to let him know that my mother had been a Madoff customer and to ask him to research the particulars of my mother’s account. The short answer is that it never occurred to me, though I did know that the Trustee was aware of an account in the name of the Estate of Dorothy G. Becker. Nevertheless, I am not at all sure that it would have been appropriate for me to have contacted the Trustee. There are strict ethical prohibitions on using one’s public office for private gain … .
With respect to his participation in determining what recommendation the SEC’s staff would make regarding 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, Mr. Becker stated: "I did not think about myself at all. My only concerns were to serve investors and to follow the law."
Mr. Becker concluded that the entire matter was a "dreadful experience" personally, and feared it "also has been a dreadful experience for the public interest." However, he also stated that "no vision of the public interest contemplates a Securities and Exchange Commission whose members and whose staff are afraid of making any decision, lest they be subject to intense personal attacks and investigations whose targets are random and whose outcomes are unpredictable. A Commission whose members and staff rightly fear for their professional lives is in no position to concentrate solely on the public. … The need for reform is urgent, but it will not succeed if unrelenting attacks take the place of constructive and civil engagement."
Chairman Mary Schapiro (whose testimony is available here) told the Committees that there "were a number of important facts about Mr. Becker’s situation that I did not either know or appreciate at the time," but emphasized that "Mr. Becker was a dedicated public servant and experienced attorney who had ably served as General Counsel under three Chairmen." She correctly assumed that "he would seek guidance from the agency Ethics Counsel." However, she also acknowledged that:
as Chairman, I need to have a broader vision that goes beyond what may be required in any particular situation. On all such matters, I need to be acutely sensitive to any issue that could potentially interfere with the Commission’s ability to fulfill its mission with the full confidence of the investing public.
Chairman Schapiro agreed with the recommendations made in the OIG Report to "further improve [the SEC’s] ethics program," and concluded that the SEC has "learned from this experience and are taking, and will continue to take, all actions necessary to earn and maintain the trust the public places in [the agency]."
UPDATE on September 23: Corporate Counsel Magazine’s Daily Alert (available on Law.com here) provides a further report on the testimony, including the questioning of the witnesses by Subcommittee members.