National Archives criticizes SEC record storage

Senator Charles Grassley says the SEC’s disposal policies appear to handicap it in complex investigations. Senator Charles Grassley says the SEC’s disposal policies appear to handicap it in complex investigations.
By Edward Wyatt
New York Times / August 19, 2011

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WASHINGTON - More than a year after a whistle-blower said that the Securities and Exchange Commission was illegally destroying records of preliminary investigations, the commission has yet to agree with government archivists on which records to keep and which to discard.

That has worried Paul M. Wester Jr., chief records officer at the National Archives and Records Administration, who has written three letters to the SEC since July 2010 on the matter. His concern was repeated yesterday in a statement by the archives.

In the absence of an approved plan to retain records, Wester wrote in one of the letters, the agency “remains concerned’’ that the records “remain at risk,’’ despite an SEC guarantee that it has been keeping those documents since the disposal policy came to light last year.

The SEC “did not have authority to dispose of’’ the records, the statement said. The archives is continuing “to work with the SEC to prevent future unauthorized destruction’’ of investigation files.

The records at issue involved preliminary inquiries, known as matters under investigation or MUIs, which are inquiries the SEC’s enforcement staff decided not to elevate to full investigations. Typically, these files include “correspondence, interagency memoranda or other documents supporting a decision not to open a formal investigation,’’ according to an SEC letter from last year.

John Nester, an SEC spokesman, confirmed that the agency was working with the archives to agree on a policy on retention of investigative files. “You have to be thorough and deliberative,’’ he said.

The SEC’s policy had long been to dispose of documents related to a preliminary investigation if the agency’s enforcement division decided to close the inquiry. If the SEC decided to upgrade an inquiry to a full investigation, all records from both the preliminary and the formal investigation were retained.

The policy to dispose of documents was almost unknown outside the SEC until last year, when Darcy Flynn, an employee for 13 years in the SEC’s enforcement division, took the information to the National Archives, which began an investigation in July 2010.

In a letter documenting Flynn’s charges, written by his lawyer, Gary J. Aguirre, he maintains that at least 9,000 case files were destroyed over the last two decades.

Two months ago, unsatisfied with the SEC’s response to the National Archives investigation, Flynn hired Aguirre, of San Diego. Last month, he told his story to investigators for the Senate Judiciary Committee, which has opened an inquiry.

It is not clear exactly how the document disposal policy came into practice. Nester, the SEC spokesman, said the policy of how to dispose of a case dates to at least 1992. At about that time, the enforcement division issued guidelines that documents related to preliminary inquiries should be disposed of if a file was closed without being upgraded to a formal investigation. A new tracking system installed about five years ago allowed the agency to keep more information about cases even after they were closed, he said.

The document disposal is a concern, however, because it “would appear to greatly handicap the SEC’s ability to create patterns in complex cases,’’ Senator Charles E. Grassley, an Iowa Republican who is the ranking member of the Senate Judiciary Committee, said in a letter to the SEC chairwoman, Mary L. Schapiro.

“It doesn’t make sense that an agency responsible for investigations would want to get rid of potential evidence,’’ Grassley said in a separate statement.

Flynn, the whistle-blower, who continues to work at the SEC, declined an interview request through his lawyer. The lawyer, Aguirre, has significant experience with whistle-blower cases.

A former staff lawyer at the agency, Aguirre was fired in 2005 during an insider-trading investigation involving a prominent hedge fund. After filing a whistle-blower wrongful termination lawsuit, he received a $755,000 settlement from the SEC in June 2010.