[ by Melanie Gretchen ]

H. David Kotz may have a new legacy to look forward to, after an outside review uncovered numerous ethics rules violations by the former inspector general of the SEC.  Unfortunately, the cases he may have impacted with a  (potentially) biased hand were some of the biggest cases in the Agency's history -- for instance the Allen Stanford Ponzi scheme.

Ethics in Question. Specifically, the former internal watchdog for the agency oversaw investigations that touched on people with whom he had "personal relationships," the review found.  Kotz resigned as the agency’s inspector general in January amid questions about his tactics and conduct. David Williams, the inspector general of the U.S. Postal, led the review. Here's what he discovered:

• he shouldn’t have participated in a probe of the SEC’s office re-organization because he engaged in "extensive" and "flirtatious" communications with an employee associated with the project
• he shouldn’t have opened and supervised an investigation into the court-appointed receiver in the Stanford case because of his relationship with a female attorney, Gaytri Kachroo, whom he listed as a business reference and a "personal friend," 1 month after beginning the probe
• he may have compromised the SEC's work on the the Bernie Madoff Ponzi scheme – his most high-profile investigation – because of his friendship with whistleblower Harry Markopolos; this would have violated U.S. ethics rules if their relationship began before or during Kotz’s probe

Case in Point: The SEC reorganization. It should be noted that the review found there was no evidence Kotz interfered with his investigators’ conclusions.  However, if all of his actions and reactions went like this, he was right to resign when he did:

In a July 20, 2008 e-mail included in the review, the woman working at the SEC during the reorganization with the project wrote to Kotz that she had “resorted to retail therapy.”

Kotz: Nice, what are you buying? How about a short skirt or two?

The woman asked whether she was exempt from the dress code, to which Kotz replied, "Special exemption for after work get togethers."

Adding insult to injury: During a 9/4 interview with investigators, Kotz denied having any personal, romantic or sexual relationship with the woman.  Confronted with e-mail, he said he was simply talking to her the way he would talk to any other employee and that he didn’t believe any of the communications were inappropriate, the report said.

In the Wake of His Departure. During his 4-year tenure at the SEC, Kotz enjoyed external praise and internal (but public) criticism.

• Pro: he investigated thoroughly and was willing to hold the agency accountable for missteps overseeing Wall Street
• Con: his probes lacked evidence of wrongdoing and unfairly damaged workers’ reputations

These days, Kotz is working as a director at Berkeley Research Group, a consulting firm in Washington.  In his place, the SEC watchdog office is being overseen on a temporary basis by Jon Rymer, the inspector general of the Federal Deposit Insurance Corp. since 2006.  [C-I Note: Nowithstanding his exemplary record, Mr. Rymer didn't have a hard act to follow.]

For further details, go to [Bloomberg, 10/5/12].