Rolling Stone's bombastic financial writer Matt Taibbi's new piece accuses the Securities and Exchange Commision of destroying thousands of documents related to investigations of investment banks and hedge funds over the past two decades. SEC attorney Darcy Flynn, who worked at the agency for 13 years, recently told Congress about the practice of systematically destroying documents related to investigations that were not approved to become full-blown official investigations. Included in the destroyed files were reports relating to Bernie Madoff and many banks involved in the financial crisis of 2008. Flynn legally can't talk to the press, but Taibbi has uncovered some of his testimony.
Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency's records -- "including case files relating to preliminary investigations" -- are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term "Orwellian," devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases -- known as MUIs, or "Matters Under Inquiry" -- was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission's internal website. "After you have closed a MUI that has not become an investigation," the site advised staffers, "you should dispose of any documents obtained in connection with the MUI."Many of the destroyed files involved companies and individuals who would later play prominent roles in the economic meltdown of 2008. Two MUIs involving con artist Bernie Madoff vanished. So did a 2002 inquiry into financial fraud at Lehman Brothers, as well as a 2005 case of insider trading at the same soon-to-be-bankrupt bank. A 2009 preliminary investigation of insider trading by Goldman Sachs was deleted, along with records for at least three cases involving the infamous hedge fund SAC Capital.
In at least one case, according to Flynn, investigators at the SEC found their desire to bring a case against an influential bank thwarted by senior officials in the enforcement division -- whose director turned around and accepted a lucrative job from the very same bank they had been prevented from investigating. In another case, the agency farmed out its inquiry to a private law firm -- one hired by the company under investigation. The outside firm, unsurprisingly, concluded that no further investigation of its client was necessary. To complete the bureaucratic laundering process, Flynn says, the SEC dropped the case and destroyed the files.