By Peter Schroeder - 01/26/12 10:00 AM EST
H. David Kotz has had an eventful four years watching the watchdog of Wall Street.
Kotz, the Securities and Exchange Commission’s (SEC) inspector general, will leave his post at the end of January, closing out a tenure that spanned one of the most tumultuous eras in the agency’s history.
Kotz also investigated questionable office leasing practices on the part of the SEC and looked into reports of employees watching pornography on government computers — all while the SEC took on the challenge of implementing complex pieces of the Dodd-Frank financial reform law.
“It’s been a roller coaster ride,” Kotz told The Hill in an interview at his office. “We’ve made an impact, and we’ve contributed to a stronger SEC than the one that was in place before I came here.
“It’s critical that every agency have an internal watchdog … even if it is a watchdog agency itself.”
Kotz did not come to the SEC from the world of finance but rather from the Peace Corps, where he likewise served as inspector general (IG).
He joined the SEC right as the global financial system stood on the precipice and had to quickly get up to speed, aided by a staff that grew from nine to 25 under his watch.
Now bound for an investigative firm in the private sector, Kotz admits he might have ruffled some feathers.
In December, Reuters reported that two SEC employees had filed formal complaints against Kotz, alleging he bullied witnesses to build his headline-grabbing reports.
Kotz denies those claims but says he surely upset some people at the SEC. If one wants to be an effective IG, he said, it comes with the territory.
“You always have that tension, any time you’re an IG,” he said. “If you’re investigating somebody, they’re probably not very happy to be investigated.”
But for members of Congress on the hunt for government misbehavior, Kotz’s work speaks for itself.
When the SEC announced his departure, Sen. Chuck Grassley (R-Iowa) issued a glowing statement about his tenure.
“David Kotz produced strong, conclusive reports, even as critics claimed he was too aggressive,” he said. “An aggressive, independent inspector general is best for the agency in the long run, even if that’s uncomfortable for management.”
Another lawmaker known for probing for government mismanagement, House Oversight Committee Chairman Darrell Issa (R-Calif.), offered similar praise.
“As inspector general … he has been independent, thorough and unafraid to challenge entrenched interests,” Issa said.
Kotz said he had a strong ally in the head of the agency, Mary Schapiro. Following the public outrage over the SEC’s failure to sniff out the financial crisis, President Obama tapped Schapiro to whip the regulator into shape.
Kotz said that when it comes to fixing the SEC, the two usually saw eye to eye.
“I have a very, very good relationship with Mary Schapiro,” he said. “She is somebody who has very much wanted to try and find out what’s going on and to see how she can fix things.”
Schapiro praised Kotz when the SEC announced his departure, calling him “a committed public servant who has served the agency with great distinction.”
Kotz said the centerpiece of his tenure as IG is the massive report on the multibillion-dollar Ponzi scheme of Bernie Madoff. The SEC examined Madoff several times before the widespread fraud came to light and ignored warnings from outside sources about his activities.
To this day, critics of the SEC — including Republicans looking to slash its budget — will cite the Madoff miss as emblematic of the regulator’s shortcomings. A “Madoff specter” still looms over the SEC, Kotz said.
The 2009 IG report spanned 477 pages, and was the result of nine months of work by Kotz’s team. Over 500 exhibits were included in the report, and over 100 people were interviewed.
The scathing report details numerous instances when SEC employees failed to spot clear evidence that something was awry. The two offices charged with overseeing Madoff have undergone significant changes since the report, Kotz said.
“I can’t tell you how many Madoff victims came to us and thanked us for shedding a light on what happened,” he said. “People’s lives are destroyed, but they can find some solace in knowing there was change as a result.”