On Wednesday, Mike Taibbi of Rolling Stone magazine asked the question:  Is the SEC Covering Up Wall Street Crimes?  Yes, that Mike Taibbi - the Rolling Stone reporter who infamously described Goldman Sachs as being “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

Mr. Taibbi wrote that a whistleblower at the SEC - 13-year SEC veteran Darcy Flynn - claims that over the past 2 decades, the Agency has destroyed records of thousands of investigations, whitewashing the files of some of the nation's worst financial criminals. 

Very serious charges that has awakened certain parts of Washington, D.C. - namely, the Senate Judiciary Committee, the National Archives and Records Administration ("NARA"), and SEC Inspector General H. David Kotz.

Record Retention Deal Between SEC and NARA.   Mr. Taibbi reports that the SEC had worked out a deal with the National Archives and Records Administration, calling for the following:

all of the agency's records – "including case files relating to preliminary investigations" – are supposed to be maintained for at least 25 years.  But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term "Orwellian," devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation.  Amazingly, the wholesale destruction of the cases – known as MUIs, or "Matters Under Inquiry" – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission's internal website. "After you have closed a MUI that has not become an investigation," the site advised staffers, "you should dispose of any documents obtained in connection with the MUI."

Contents of Destroyed Files.   Many of the destroyed files involved companies and individuals who would later play prominent roles in the economic meltdown of 2008.  Two MUIs involving con artist Bernie Madoff vanished.  So did a 2002 inquiry into financial fraud at Lehman Brothers, as well as a 2005 case of insider trading at the same soon-to-be-bankrupt bank.  A 2009 preliminary investigation of insider trading by Goldman Sachs was deleted, along with records for at least three cases involving the infamous hedge fund SAC Capital.

Darcy Flynn Blows the Whistle.   Mr. Flynn alerted Congress in July as to the widespread destruction of records - and he was responsible for helping manage the disposal project.  After he alerted NARA to the problem, Flynn reports, senior staff at the SEC scrambled to hide the commission's improprieties.

As a federally protected whistle-blower, Flynn is not permitted to speak to the press. But in evidence he presented to the SEC's inspector general and three congressional committees earlier this summer, the 13-year veteran of the agency paints a startling picture of a federal police force that has effectively been conquered by the financial criminals it is charged with investigating. In at least one case, according to Flynn, investigators at the SEC found their desire to bring a case against an influential bank thwarted by senior officials in the enforcement division – whose director turned around and accepted a lucrative job from the very same bank they had been prevented from investigating. In another case, the agency farmed out its inquiry to a private law firm – one hired by the company under investigation. The outside firm, unsurprisingly, concluded that no further investigation of its client was necessary. To complete the bureaucratic laundering process, Flynn says, the SEC dropped the case and destroyed the files.

Continue reading on:  [Rolling Stone, 8/17/11, Is the SEC Covering Up.."]

Also, go to our related story in:  [RULE News for the 8/18/11 post, "Whistleblower at the SEC."]