H. David Kotz, the SEC's Inspector General, faces mounting criticism from Commission personnel over some of the investigative techniques that have won him plaudits on Capitol Hill.  Two formal complaints against Kotz, filed this year with a government council that monitors the work of all 73 federal inspectors general, alleged that, among other things, the 45-year-old inspector general bullied witnesses and twisted facts to build cases against them. Current and former SEC employees and outside lawyers say Kotz's quest to uncover waste, fraud and abuse at the Commission has gone overboard.  And, it's been said his over-zealousness has led some talented lawyers to leave the Agency, and others to worry about being second-guessed about decisions made on enforcement actions.  Some SEC lawyers are further fearful of Kotz's frequent reviews of government email, which has made them overly guarded in how they express their thoughts to others.

[C-I Note: The general nature of the above complaints and concerns are commonplace in the securities industry.  First, it needs to be understood that the Inspector General's office essentially does the work that an internal audit department does.  And frankly, very few people in any organization and in any industry like auditors.  Being a CPA and having been an internal auditor with major broker-dealers, I've experienced this attitude first-hand.  And it's something we deal with, although it's rarely appreciated.

The email issue began several years ago, when field examiners with NASD/FINRA and the SEC rifled through selected personnel - at first, the email accounts of trading and sales supervisors, then those of compliance and legal personnel.  The examiners figured that employees throughout a firm would report on all sorts of issues to their managers, as well as to legal and compliance personnel.  It's a concern that everyone now shares - in both business and personal situations - so, this too, we are learning to live with.]

Linda Baier Complaint: 'TRUMPED UP RETALIATION'. Linda Baier, acting branch chief of acquisition policy, filed a wide-ranging complaint in August against Kotz.  It was filed with the Council of Inspectors General on Integrity and Efficiency (CIGIE), alleging improprieties with audits and investigations into the leasing, contracting and acquisition functions of the agency. Some of her allegations involve other SEC colleagues whom she says also were unfairly targeted by Kotz.  In her case, Ms. Baier contends that she unwittingly became an investigation target after she criticized Kotz for not aggressively pursuing allegations against another SEC employee.  She and other staffer told Kotz they felt one of his reports did not go far enough in investigating potential misconduct by an employee in her division. The pair investigated further, and reported their findings to the SEC's HR department, which then disciplined the employee.  Shortly after that, Kotz began investigating Ms. Baier's own activities. Ms. Baier claimed in her complaint that Kotz honed in on a grammatical error on one of her emails which, she admits, made made it appear that she had erred by prematurely selecting a certain contractor to hire when, in fact, she hadn't.  Kotz allegedly tried to get her disciplined, but her managers decided to take no action.  Baier characterized this action by Kotz as something that was "solely trumped up retaliation."  Baier further alleges that Kotz, at least on two occasions, may have tried to charge her with circumventing competitive bidding rules.  Neither of those charges were true, she claims. Nancy McGinley Complaint:  REPUTATION-DAMNING REFERRALS? In April, veteran enforcement attorney Nancy McGinley filed a complaint with CIGIE against Kotz and two other SEC offices after she and another colleague were accused of possibly trading on insider information - a finding noted in a 2009 investigative report.  When the report became public, their names were redacted, but many juicy details remained, making it easy for them to be identified.  Their names shortly thereafter were leaked to the press, and the matter became widely publicized. The Justice Department decided not to prosecute McGinley or her colleague, according to McGinley's lawyer and people familiar with the matter.  No one at the SEC, including Kotz, has publicly acknowledged that the entire matter was dropped. In her complaint, McGinley further notes that the SEC's ethics office assured her there were no problems with her stock trades, and she alleged that Kotz tried to get prosecutors to pursue obstruction of justice charges against her - another referral that she says went nowhere. Kotz's Responses. While Kotz wouldn't comment on the Justice Department decision, he had said that his office played no part in leaking McGinley's name to the media. He also said his office, in general, is not responsible for deciding which information from his investigative reports goes public.  "If there has been a criminal referral, I would certainly prefer that the names of the individuals who have been referred not be publicly released," he said.  With regard to Baier, Kotz vigorously denied all of Baier's allegations. He also dismisses the criticisms as the kind of carping that comes from people working for an organization that is getting looked at closely for the first time in years.  He claimed that all allegations in the two complaints are false, and denies doing anything to instill fear in SEC employees.  He also pointed noted that the number of formal complaints lodged against him is small, given his nearly 4-year tenure at the SEC, saying: "I think employees who have dealt with my staff or me personally realize that we are just doing our job. I would say to employees that if you have not done anything wrong, you have no reason to be concerned." For further details, go to [Reuters 12/2/11]