The SEC recently admonished its enforcement staff attorneys to cease any efforts to purge documents from investigative files amidst criticism that the agency wrongfully destroyed thousands of documents related to high profile enforcement matters, including major fraud investigations involving Wall Street banks. The cease order was disclosed in a letter last month from the SEC’s general counsel. The order was precipitated by a whistleblower — long-time SEC enforcement attorney Darcy Flynn — who advised key congressional representatives that the agency had destroyed thousands of investigative files from preliminary enforcement investigations (internally referred to as “MUIs” — or matters under inquiry).
The controversy has caused the agency to revisit its document retention policy, which is being examined by the National Archives and Records Administration (NARA), as well as the SEC’s inspector general. In the past, the SEC typically discarded documents from MUIs that did not grow into formal investigations (and, therefore, were closed), as well as files from enforcement proceedings that had been adjudicated or settled. While the practice of discarding old documents and closed files is typical for private institutions, it appears that for the SEC, it will be a thing of the past. In August, NARA accused the SEC of improperly destroying investigative records, which included closed case files, as well as MUIs, over a 17 year period in violation of federal rules. The SEC’s inspector general is expected to issue shortly a report of the findings from his investigation. The fact that MUIs generally involve very few facts, incomplete information and preliminary determinations has not dampened NARA’s interest in the document destruction. Rather, the issue is whether the agency destroyed documents in an effort to avoid the burden of compliance with federal rules.
Federal law (44 U.S.C. § 3101) requires federal agencies to preserve records regarding, among other things, policies, procedures, decisions and transactions of the agency. The SEC has received sharp criticism from key members of Congress, including Republican Senator Charles Grassley, who wrote a letter to the SEC Chairwoman inquiring whether the agency ran afoul of federal rules through its typical document destruction procedures. Some of the destroyed MUI files concerned what are now high profile cases, including the Madoff Ponzi scheme and high profile Wall Street bank fraud cases. This fact, however, was apparently not the key focus of the whistleblower’s concern. The issue is whether MUIs files (or files of other closed cases for that matter) could be helpful in future investigations — including those unrelated to the facts or circumstances at issue in the MUI. Sometimes, the same players surface in different cases, and files from one old or closed case can be useful in investigating an entirely separate and unrelated fraud.
It is fair to question whether this justifies the burden of archiving extraordinary volumes of documents. The goal of the enforcement arm of the SEC is to ferret out securities fraud and appropriately charge the wrongdoers. One could argue that a focus on records retention diverts focus from that goal. A counter argument, however, is that proper enforcement necessitates comprehensive records retention. For now, the SEC is working with NARA to revamp its records retention policy. It remains to be seen whether the agency will be required to comply with an enhanced set of records retention rules and, if so, precisely what those rules will entail.