The curious Mr. Kotz and the SEC

December 2, 2011

By Matthew Goldstein

If we’ve learned nothing from the financial crisis, it’s that we need smart regulators to be minding the store. And we need someone to make sure the regulators are up to that job and not shirking their responsibilities.

So it was a breath of fresh air when David Kotz assumed the role of inspector general of the Securities and Exchange Commission in 2007.

Kotz attacked the job with a welcome aggressiveness and his exhaustive 477-report on the Madoff mess shed some much needed sunshine on the SEC’s fumbling and bumbling of the investigation into the world’s biggest Ponzi scheme. The report prodded regulators to speed up the creation of a new multi-million dollar database for handling tips and complaints from informants–a big failing of the SEC in Madoff.

But now questions are being raised whether Kotz has gone too far in trying to scour out the slackers at the SEC. Reuters reporter Sarah N. Lynch writes today about a number of SEC employees who have filed formal complaints about Kotz and his investigative tactics. Two of the women filing complaints were targeted by Kotz but ultimately cleared of any allegations of wrongdoing or improper behavior.

The complaints bring to light something that people close to the SEC have been whispering for a while–which is that Kotz’s many investigations are promoting a culture of fear within the agency. SEC lawyers who once responded to reporter emails or phones calls–even if politely to simply say ‘no comment’–now don’t even bother. SEC lawyers have told people they are afraid that by doing so, they will be investigated by Kotz for improperly leaking information.

Now it’s important for the SEC and any government regulator to have a strong and vigilant oversight. But at the same time, it’s important that oversight doesn’t become so onerous that regulators start looking over their shoulders and second-guessing everything they do.

It’s not clear if this is the situation with Kotz. So far, only two formal complaints have been filed against him. And, as we point out in our story, Kotz adamantly denies he that he has done anything wrong. But our Insight piece on Kotz, which you can read here in PDF form, raises some interesting questions about what constitutes oversight run a muck.

To read one of the formal complaints filed against Kotz, click here.


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