Phil Cannella comments on H. David Kotz Resigning as SEC Inspector General.
Per Phil Cannella, It’s no secret that it’s hard for a man of principle to survive very long in the corrupt, politically charged environment of Washington. So the news that H. David Kotz—whom we interviewed at length last summer—will soon leave his post as SEC Inspector General cannot come as too much of a shock. It may be premature to say that Kotz was forced out of his job, but certainly he made many powerful enemies through his “pull no punches” investigative style. From the outset, the Washington and Wall Street establishments seemed bent on discrediting him. And Kotz’s lengthy, remarkably candid videotaped interview with Phil Cannella, founder and CEO of Retirement Media, Inc., may have been the final straw in his fate. Kotz was an aggressive watchdog, conducting 140 full investigative reviews and 50 audits in his four years—nearly double the output of his predecessor, Walter Stachnik, in a similar time period. According to Kotz, SECmanagement agreed with 95 percent of the 685 recommendations contained in those reviews. Time and again he took embarrassing secret foul-ups that the SEC would’ve preferred to forget and turned them into bold-face headlines—which, of course, is what a good watchdog does He detailed how the SEC botched a pair of investigations into multi-billion-dollar Ponzi schemes (Madoff and Stanford). He exposed an ill-advised $557 million leasing scandal for SEC office space in which the agency’s own staffers submitted bogus documents. He revealed that SEC workers had been surfing porn on company time. He was critical of the agency’s handling of the case of lawyer Gary Aguirre, who’d been abruptly terminated after his inquiry into a major insider-trading case led him to Morgan Stanley CEO John Mack, a supposed Wall Street “untouchable.” Naturally, these revelations did not go over well with some insiders. “He was a sitting duck for those humiliated by his work, and for his target’s friends,” wrote Bloomberg’s Susan Antilla. SEC staffers accused him of “abusive investigative practices.” Former SEC chairman Harvey Pitt, in an email to top securities lawyers, accused Kotz of conducting a “reign of terror” that was hampering the SEC’s effectiveness. (Pitt himself had left the agency under a cloud.) Then, last September, Kotz called for a criminal probe into the SEC’s former top lawyer, David Becker. Kotz pointed out that because Becker had indirectly profited from a Madoff investment, there was a clear conflict of interest in his handling of the Madoff case. The SEC declined to take action, but Becker’s friends and allies did: 52 securities lawyers, academics, and sitting securities regulators, including FINRA chairman Richard G. Ketchum, contacted congressional committee members to defend Becker—and attack Kotz.
But it hardly seems coincidental that the campaign to discredit Kotz kicked into high gear after we uploaded his extended, remarkably candid interview with Phil Cannella to the Web.
“Let’s look at the timeline,” says Phil Cannella.“Kotz gives us an interview in which he voices a great deal of skepticism about the SEC. Instead of focusing on the issues, the SEC makes a stink about some football tickets that Kotz later obtained from us—and paid for in full. Then they try to pressure us to stop showing the interview. And next thing you know, Kotz himself resigns.” Among the highlights of the interview:
- Kotz described the SEC as generally overmatched by the industry it regulates: “The fraudsters are always sort of ahead of the government… There’s always…more resources, there’s more technology that fraudsters potentially have, and companies have that engage in wrongdoing.”
- He lamented the notorious revolving door between the SEC and the financial industry, which has supplied the agency with over one-third of its staff: “I do think that there have to be policies and procedures put into place to ensure that information that is learned at the SEC is not then shared with folks outside…. That’s something that is very dangerous to how the SEC operates.”
- But Kotz’s most controversial answer addressed the question of whether retirees should be in the stock market: “Well, I wouldn’t presume to tell anyone how to invest their money and I’m not an investment advisor… I think we do have a situation today where so much money is in the stock market, where people’s lives are so affected by it that sometimes it may make sense to take things out in turbulent times to ensure that you’re not living and dying, so to speak, by the Dow Jones going up and down, particularly with what has occurred over the last several years.”
Ironically, Kotz also told Phil Cannella that he did not think he would lose his job for “getting too close” to the truth.” Reaction to Kotz’s resignation was mixed. “SEC losing credibility with Kotz’s exit,” read one headline. For her part, SEC chairperson Mary Schapiro declined to comment, saying through a spokesman that “it would not be appropriate for the chairman to discuss personnel matters.” But according to The Wall Street Journal, “Many officials at the SEC were privately celebrating [Kotz’s] departure…” Kotz will now take a position as managing director of Gryphon Strategies, a corporate investigations firm that specializes in due diligence, litigation support, and high-liability insurance-fraud cases. He announced in a statement that he will focus on “assisting whistle-blowers in exposing fraud and improving government accountability.” It’s interesting that Kotz made a point of mentioning “whistle-blowers.” You have to wonder if, in a sense, he was thinking of his own career at the SEC, where he may have seen himself as an embattled whistleblower.