Opinion

Alison Frankel

A cautionary tale for whistle-blowers, from the SEC’s own ranks

By Alison Frankel
November 16, 2012

On Thursday, the Securities and Exchange Commission released its annual report on the activities of the whistle-blower office it established in late 2011, at the direction of the Dodd-Frank Act. The office’s eight lawyers received 3,001 whistle-blower tips in the SEC’s fiscal year 2012, which ended on Sept. 30. A total of 547 tips involved alleged misconduct in corporate disclosure, 465 alleged offering fraud and 457 related to stock manipulation. At least one bore fruit: In August, the SEC made its first bounty payment to a whistle-blower whose tip led to a judgment of more than $1 million. The agency said the whistle-blower office is processing an undisclosed number of additional whistle-blower bounty applications.

In an odd quirk of timing, on the same day that the SEC reported on the whistle-blower tips it has received, it was hit with a $20 million suit by a former member of its own inspector general’s office. David Weber, who was terminated last month from his post as assistant IG for investigations, claims he was fired for blowing the whistle on misconduct by former IG David Kotz, the aggressive ethics cop known for probes of the SEC’s former general counsel David Becker and enforcement director Robert Khuzami.

Weber’s 77-page complaint, filed by his lawyers at Joseph, Greenwald & Laake in federal district court in Washington, portrays the SEC IG’s office as a hotbed of sexual tension and professional backstabbing — irony indeed, considering that the office’s entire purpose is to police the conduct of SEC employees. From Weber’s telling, the top echelon of the IG’s office seemed to spend a disproportionate amount of time on internecine accusations and investigations. His own downfall, he asserts, was triggered by his report to the five SEC commissioners that the acting IG, who allegedly had a sexual history with Kotz, was covering up Kotz’s conflicts of interests in high-profile investigations. (Seriously, the allegations in Weber’s complaint could be the basis of a prime-time soap opera.)

Kotz had already resigned by the time Weber went to the commissioners in March 2012, but Weber claims that the acting IG and other higher-ups in the office began a campaign of retaliation against him. He asserts he was accused of threatening others in the office and stripped of support staff. In May, only five months after Weber began working at the SEC, he was placed on administrative leave and barred from entering his office by armed guards. (According to Weber, the head of SEC security, who participated in the action against him, was himself under investigation by the IG’s office, as was the SEC’s chief operating officer, who signed the order placing Weber on leave.) After Weber was removed from the SEC building, press reports about him wanting to carry a gun to work began to surface. Weber claims in his suit that the press leaks were designed not only to punish him professionally but also to impair his chances of gaining full custody of his three children in a dispute with his first wife.

Weber claims that SEC Chairman Mary Schapiro — also allegedly under IG investigation for lying in congressional testimony — perjured herself when she told Congress in the spring of 2012 that Weber was found to be a security risk. (The security assessment, according to Weber, was conducted by a contractor whose ethics he had questioned, but he claims that the assessment nevertheless concluded that he presented a low risk of violence in the workplace.)

The SEC ultimately asked the inspector general of the U.S. Postal Service to investigate Weber and his allegations. As Reuters reported in a story about the USPS report on Oct. 5, the outside investigation found that Kotz may have had conflicts of interest in key investigations, as Weber had alleged. The report also, according to Reuters, “did not substantiate allegations that Weber created a hostile work environment.”

Weber’s complaint said that he regarded the USPS report as vindication, but, despite its conclusions, he was terminated on Oct. 31. His lawyer, Cary Hansel of Joseph Greenwald, said Weber was fired for supposedly talking about bringing a gun to the office, even though he was supposedly cleared by the outside investigation.

Whatever you think of Weber’s allegations — and they are, admittedly, hard to swallow in their entirety — his complaint is a catalog of the potentially ruinous consequences of making waves. Whistle-blowing may be in vogue, with tipsters who alert the federal government sometimes earning millions of dollars, but it’s not an easy path.

“This is a classic case of whistle-blowing, a horrible example of what can happen,” said Weber lawyer Hansel. “I believe the SEC’s intent was to send a message to other whistle-blowers” inside the agency. Hansel said that as a result of the media leaks about Weber’s threatening behavior and his ultimate termination, Weber is “effectively unemployable,” despite almost 20 years of service as a government lawyer. (He has started a firm,Goodwin Weber, with his current wife.) Weber’s custody case has also suffered, Hansel said. “It’s one thing to attack a man and his career, it’s another to affect his family life,” he said. “That’s disgusting.”

An SEC representative said in an email response to a request for comment that the agency is looking forward to filing a response to Weber in court. He declined additional comment. I left messages with Weber and Kotz but didn’t hear back.

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