'Illegally destroyed files and documents related to thousands of early-stage investigations over the last 20 years'.  That's what the SEC did, according to an SEC enforcement lawyer.  The SEC Office of the Whistleblower, which just hung out its "Open For Business" sign last Friday, now is dealing with its first serious referral.  The matter was first reported by Mike Taibbi of Rolling Stone magazine.

The destroyed files included records of at least 9,000 preliminary inquiries - some involving individuals like Bernie Madoff, and firms that later were scrutinized after the 2008 financial crisis  like Goldman Sachs, Lehman Brothers, Citigroup and Bank of America.  At one time it was "standard operating procedure" for the SEC to dispose of records related to preliminary inquiries that had had closed and were not upgraded to a formal investigation.  While that policy was changed last year regarding "matters under investigation," the Agency believes that both the original policy and the new rules comply with federal document-retention laws.

SEC's Whistleblower.   Changes were made to the policy after questions about the document destruction were raised in early 2010 by Darcy Flynn, who worked in SEC Enforcement for 13 years.  In January 2010, Mr. Flynn switched responsibilities - he helped manage the disposition of records for the division - and Mr. Flynn continues to work at the SEC.  He has sought protection under federal whistle-blower laws.

Document disposal is the subject of inquiries by the Senate Judiciary Committee, the National Archives and Records Administration (which oversees laws governing federal agency records), and the SEC Inspector General.  In addition to whether the document disposal violated federal laws about government records, officials are concerned that the SEC policy might have hindered later investigations into the same people or companies or covered up wrongdoing.

“These records may contain critical information that could be extremely useful in piecing together complex cases, even if not immediately pursued.”  Senator Charles E. Grassley (R-IA) in letter to SEC.

SEC Inspector General H. David Kotz said that he was investigating the issue and hoped to complete a report by the end of September.  A spokesman for the National Archives did not respond to requests for comment late Wednesday afternoon.  The National Archives wrote to the SEC last year referring to what appeared to have been "an unauthorized disposal of federal records,” and asked for further information, according to Mr. Flynn’s chronology.

Mr. Flynn said that SEC officials discussed whether to lie about the document destruction because they might be open to criminal liability.  Unlawful and willful destruction of federal records is punishable by up to 3 years in prison.  Ultimately, the SEC replied to the National Archives by letter, saying it was “not aware of any specific instances of the destruction of records” that should have been retained - and added that it “cannot say with certainty that no such documents have been destroyed over the past 17 years.”   [C-I: Obfuscation?]

For further information, go to:   [NYTimes, 8/17/11]