H. David Kotz: Difference between revisions

H. David Kotz (born June 24, 1966, in Toronto, Canada) was Inspector General of the U.S. Securities and Exchange Commission (SEC) from December 5, 2007 until 2012.^[1] In January 2012, the SEC announced Kotz would be stepping down.^[2][3]

Kotz graduated cum laude from the University of Maryland, College Park in 1987 with a B.A. in Government and Politics, and earned his J.D. at Cornell Law School in 1990.^[1]

In his early career, Kotz worked as a litigation associate at three law firms, working on commercial litigation, discrimination, personal injury, and sexual harassment matters: Graham & James (1990-92) and Stults & Balber (1992-94) in New York City, and Pepper Hamilton LLP (1994-99) in Washington, DC.^[4][5][6][7]

Kotz worked at the U.S. Agency for International Development (USAID) from 1998–2002, where he was an Attorney Advisor in the Office of the General Counsel and later a Chief in the Office of Labor and Employee Relations.^[1][8][9]

Kotz joined the Peace Corps in 2002, and worked there until 2007, during which time he handled labor arbitrations, employee grievances, and prosecutions of rapes, sexual assaults, and other violent crimes against volunteers.^[10][11] For three years, he was an Associate General Counsel.^[1] Starting in 2006, he worked for the Peace Corps as Inspector General.^[1]

In December 2007, Kotz next became the the Inspector General at the Securities and Exchange Commission (SEC), following the resignation of his predecessor, Walter Stachnik, who left after a Senate report criticized his performance.^[12] At the time, he had little expertise in securities law, but he was quickly pushed into the spotlight.^[13] He was tasked with conducting independent and objective audits, investigations and inspections to detect waste, fraud and abuse, and promote economy, effectiveness and efficiency.^[1][14]

Kotz's tenure at the SEC was termed "contentious" by The Wall Street Journal at the time of his departure, noting especially his many reports that cast the SEC in a negative light, including the agency's "failure" to catch Bernard Madoff and the SEC's "botched office-leasing program implemented after the Dodd-Frank financial overhaul".^[15] Mary Schapiro, Chairman of the SEC, upon her announcement of his departure from the SEC praised Kotz as a "committed public servant who has served the agency with great distinction."^[15][16]

Kotz was investigating why the SEC failed to detect the $19 billion Madoff fraud by internal reporting and investigations.^[17] He was also investigating the responses by the SEC to written complaints about Madoff. In September 2009, Kotz issued a 477-page report describing numerous failures on the part of the SEC in uncovering Madoff's Ponzi scheme, and concluding that the SEC had many opportunities to spot the Ponzi scheme but failed to do so.^[18] He followed that up with recommendations to fix the problems that contributed to the SEC's failures.

Financial analyst and whistleblower Harry Markopolos has said that Kotz "was unflagging [and h]e restored my faith," looking at Kotz's role in investigating the agency's actions in the Madoff affair in particular.^[19]

In March 2010, Kotz issued another report finding the SEC also failed to uncover a $7 billion Ponzi scheme perpetrated by Allen Stanford.

Kotz investigated a controversy reported by a former SEC lawyer who claimed he was fired in order to thwart his investigation of insider trading at Pequot Capital Management. Kotz recommended that disciplinary action be commenced against Linda Chatman Thomsen, the Director of the Division of Enforcement for the SEC.^[20] His recommendation was not accepted, and no disciplinary action was taken.^[21]

Employee Complaints

At least two formal complaints were filed against Kotz by SEC staff members (including Linda Baier, acting Branch Chief of Acquisition Policy, and Nancy McGinley, an enforcement attorney), with the Council of Inspectors General on Integrity and Efficiency (CIGIE).^[22][23][24] They alleged that Kotz distorted facts to build a case, and that he created a culture of fear at the SEC of Kotz's "false allegations and retaliations".^[25][26][27]

Another complainant against Kotz was the office's former Chief of Investigations, David Weber, who accused Kotz of improper conduct in the Madoff investigation.^[28][29] In November 2012, Weber filed a federal lawsuit in which he alleged that Kotz unethically conducted personal relationships with colleagues that might have compromised the SEC’s Madoff and Stanford prosecutions.^[30][31] Kotz responded that "for some inexplicable reason, my name has been dragged through the mud in the most ludicrous and unbelievable allegations."^{[32][33][34][35]}

Report on improper conduct by Kotz

Because of concerns of improper conduct by Kotz, Inspector General David Williams of the U.S. Postal Service was brought in to conduct an independent, outside review of Kotz's alleged improper conduct.^[36] Williams concluded in his Report that Kotz violated ethics rules by overseeing probes that involved people with whom he had conflicts of interest due to “personal relationships.”^[37][38][39] He also concluded that Kotz may have had an inappropriate relationship with an SEC employee.^{[40][41][42][43]}

One conflict of interest for which Kotz was criticized was his decision to accept club-level tickets from a financial adviser, for himself and his sons, to a sold-out Philadelphia Eagles football game.^{[44][45][46][47]} Kotz reimbursed the financial adviser $95 apiece, for three tickets that the team said had a value of $240 each.^[48] Commenting on the matter, Professor Geoffrey Hazard, a legal ethics specialist, said that “However passionate a fan you might be of the Eagles, it’s just imprudent” to take the tickets.^[49] Kotz called the incident: "an insignificant matter."^[50][51]

The Report questioned Kotz’s work on the Madoff investigation, because Kotz was a "very good friend" with the whistleblower in the case, Harry Markopolos.^[52][53] Although investigators were not able to determine when Kotz and the whistleblower became friends, the Report concluded that it would have violated U.S. ethics rules if their relationship began before or during Kotz’s investigation.^[54][55]

The Report also questioned Kotz's work on the Stanford investigation.^[56] It found that Kotz “appeared to have a conflict of interest” when he opened and supervised the investigation, because of his relationship with a Massachusetts attorney representing Stanford's victims who, one month after starting the investigation, Kotz listed as a business reference and a “personal friend”.^[57][58] Kotz met with her after his departure from the SEC in an effort to seek business for his new job.^[59][60]

The Report also found that Kotz should not have participated in a probe of the re-organization of the SEC’s office, because he engaged in “extensive” and “flirtatious” communications with a female SEC staffer associated with the project during the probe.^[61][62] Among other things, he emailed her in 2008 a suggestion that she buy a "short skirt or two," and as to the dress code he indicated that she would qualify for a “Special exemption for after work get togethers.”^[63] Kotz denied having any personal relationship with the woman.^[64][65]

Senator Charles Grassley (R-Iowa) said in a statement that the Report revealed "poor judgment".^[66]

Departure

On January 17, 2012, Kotz resigned amid criticisms of his behavior and questions about his conduct, and the SEC announced that he would leave the agency at the end of January.^{[67][68][69][70]}

In August 2012, Kotz joined the anti-corruption team as a director in the Financial Institutions practice at Berkeley Research Group.^[71]

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