Report Takes Former SEC Inspector General to Task for Allegedly Inappropriate Friendships

Matthew Huisman

Legal Times

10-09-2012

In a June 2011 National Law Journal profile of former Securities and Exchange Commission Inspector General H. David Kotz, Bernard Madoff Ponzi scheme whistleblower Harry Markopolos spoke glowingly about Kotz.

"When he got to[the SEC], it was a mess," Markopolos said. "It's a totally different agency now, in large part because of his efforts. I had lost my faith in government. But he was unflagging. Nothing deterred him or his team. He restored my faith."

Now, the U.S. Postal Service Office of the Inspector General has alleged that the two men were"very good" friends—and that the friendship may have been inappropriate, depending on when it began.

ThePostal Service IG report, recently obtained by Reuters through a Freedom of Information Act request, claimed Kotz had engaged in several conflicts of interest while serving as the top SEC internal watchdog.

The September 17 report does not identify specific examples within any of Kotz's reports that might be tainted. Kotz announced he was leaving the agency in January.
According to a Reuters account based on the report, investigators said that Kotz should have excused himself from the investigation about Ponzi scheme financier R. Allen Stanford because Kotz was friends with a female attorney who represented the victims. It also details that Kotz should also have excused himself from the SEC's re-organization because he used "flirtatious" communication with an employee working on the project.

Known for his 477-page report on the agency's failure to detect the Madoff scheme, Kotz is currently a director with Berkeley Research Group. He had a reputation as an aggressive watchdog at the SEC, so much so that David Weber, the chief investigator in the SEC's inspector general's office, accused Kotz of wrongdoing.

Yet the Postal Service report also takes Weber, who was placed on leave in May, to task for reportedly talking about wanting to carry a concealed weapon, and in general for creating a hostile work environment.

Neither Kotz nor Weber could be reached for comment. Likewise, officials at the Postal Service inspector general's office also could not be reached.

Markopolos could be reached—and in an interview, he took a dim view of the Postal Service report. (The report said that if the friendship between Kotz and Markopolos began before or during the SEC inspector general's review of Madoff, it would have been inappropriate.)

First of all, Markopolos said he hadn't even been contacted by the Postal Service inspector general as the office was researching and writing its report.

"The Postal service IG never called me as part of the investigation, which tells you about the quality of the work of the postal service IG," Markopolos said. "I read the press reports on this and I ask why they stabbed this guy in the back on the way out."

Markopolos said that his relationship with Kotz was purely professional and that he had no idea about the substance of Kotz's Madoff report prior to its publication.

"Why would I become friends with somebody before the report was issued?" Markopolos said. "Now it's a different agency. I would argue that it's a much improved agency than it was four years ago."

Due to the federal holiday, Legal Times was unable to obtain the report via Freedom of Information Act.

This article originally appeared as a post on The BLT: The Blog of LegalTimes.