SEC Accused of Destroying Documents, Violating Federal Record Management Policy

• By: Staff Editor
• Date: August 26, 2011

An SEC attorney-turned-whistleblower Darcy Flynn revealed to US Congress that the SEC was destroying records related to preliminary investigations. A report in Rolling Stone said that:

 “According to Flynn, who was responsible for helping to manage the commission's records, the SEC has been destroying records of preliminary investigations since at least 1993.”

 This, the magazine reports, was in violation of a deal that the SEC made with the National Archives and Record Administration (NARA) regarding the document retention. According to this deal, the SEC’s records “‘including case files relating to preliminary investigations’ – are supposed to be maintained for at least 25 years”.

Documents destroyed were related to MUIs

The documents that the SEC has destroyed were those gathered during a Matter Under Investigation (MUI). An MUI is the earliest stage in an inquiry initiated by the agency and according to the SEC enforcement manual, they “are preliminary in nature and typically involve incomplete information”.

Once an MUI has been opened, the SEC’s enforcement division gathers documents and conducts interviews about the issue under inquiry.

The SEC’s own guidelines for MUIs state that a decision on whether the inquiry should be pursued further or dropped should be taken within 60 days of the start of the process. Documents relating to MUIs that were closed were then destroyed.

Clarification sought from SEC Chairwoman Schapiro

Following the revelations by the whistleblower, Senator Charles Grassley sent a letter to the SEC Chairwoman Mary Schapiro asking whether the agency had broken the law and inquiring about its current document retention policy. The letter says that:

“…Mr Flynn claims that the SEC has destroyed files related to MUIs even in extremely important cases such as the investigation of Bernard Madoff, Goldman Sachs trading in AIG credit default swaps in 2009, financial fraud at Wells Fargo and Bank of America in 2008 and 2008, and insider trading investigations at Deutsche Bank, Lehman Brothers and SAC Capital. If Mr Flynn’s allegations are correct, the intentional destruction of at least 9,000 MUIs would appear to greatly handicap the SEC’s ability to create patterns in complex cases and calls into question the SEC’s ability to properly retain and catalog documents.”


Violation of NARA regulations

Federal agencies are required to follow the National Archives and Records Administration Act, specifically 44 U.S.C. Chapter 29, Records Management by the Archivist of the United States and by the Administrator of General Services. The law states that:

“head of each federal agency shall make and preserve records containing adequate and proper documentation of the organization, functions, policies, decisions, procedures and essential transactions of the agency.”

The National Archives released a statement saying that it has contacted the SEC in July 2010 regarding “an allegation that the SEC had been destroying files pertaining to Matters Under Inquiry (MUI) for the past 17 years. Because a NARA-approved disposition schedule did not exist for these records, the SEC did not have authority to dispose of them per the Federal Records Act, 44 USC 3314 and 36 CFR 1220.18.”

The National Archives has been working with the SEC to prevent future unauthorized destruction of MUI files. The statement from the National Archives also said that while it was “satisfied that the destruction has stopped”, it remained concerned about the slow pace at which the SEC was creating records schedules for review and approval by the Archivist of the United States. This process will ultimately determine how long MUI records should be retained.

Prosecution for destroying federal records

The Justice Department can prosecute the SEC for destroying federal records, a violation of 18 U.S.C. § 2071, which makes it a crime to knowingly and willfully destroy “any record, proceeding, map, book, paper, document, or other thing, filed or deposited” in any public office.

But as it was a stated official policy of the SEC to destroy MUI records (and published on the agency’s online internal policy portal), prosecutors are unlikely to charge those agency employees who may have taken part in the destruction of records.
 

Additional resources

Read 44 U.S.C. Chapter 29, Records Management by the Archivist of the United States and by the Administrator of General Services in full