[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
POTENTIAL CONFLICTS OF INTEREST
AT THE SEC: THE BECKER CASE
=======================================================================
JOINT HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
AND THE
SUBCOMMITTEE ON TARP, FINANCIAL
SERVICES AND BAILOUTS OF PUBLIC
AND PRIVATE PROGRAMS
OF THE
COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 22, 2011
__________
Printed for the use of the Committee on Financial Services and the
Committee on Oversight and Government Reform
Serial No. 112-66
Committee on Financial Services
Serial No. 112-62
Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.fdsys.gov
http://www.house.gov/reform
U.S. GOVERNMENT PRINTING OFFICE
72-607 WASHINGTON : 2012
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
Larry C. Lavender, Chief of Staff
Subcommittee on Oversight and Investigations
RANDY NEUGEBAUER, Texas, Chairman
MICHAEL G. FITZPATRICK, MICHAEL E. CAPUANO, Massachusetts,
Pennsylvania, Vice Chairman Ranking Member
PETER T. KING, New York STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota MAXINE WATERS, California
STEVAN PEARCE, New Mexico JOE BACA, California
BILL POSEY, Florida BRAD MILLER, North Carolina
NAN A. S. HAYWORTH, New York KEITH ELLISON, Minnesota
JAMES B. RENACCI, Ohio JAMES A. HIMES, Connecticut
FRANCISCO ``QUICO'' CANSECO, Texas JOHN C. CARNEY, Jr., Delaware
STEPHEN LEE FINCHER, Tennessee
COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana ELIJAH E. CUMMINGS, Maryland,
JOHN L. MICA, Florida Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of
JIM JORDAN, Ohio Columbia
JASON CHAFFETZ, Utah DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee PETER WELCH, Vermont
JOE WALSH, Illinois JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania
Lawrence J. Brady, Staff Director
John D. Cuaderes, Deputy Staff Director
Robert Borden, General Counsel
Linda A. Good, Chief Clerk
David Rapallo, Minority Staff Director
Subcommittee on TARP, Financial Services and Bailouts of Public and
Private Programs
PATRICK T. McHENRY, North Carolina, Chairman
FRANK C. GUINTA, New Hampshire, MIKE QUIGLEY, Illinois, Ranking
Vice Chairman Minority Member
ANN MARIE BUERKLE, New York CAROLYN B. MALONEY, New York
JUSTIN AMASH, Michigan PETER WELCH, Vermont
PATRICK MEEHAN, Pennsylvania JOHN A. YARMUTH, Kentucky
JOE WALSH, Illinois JACKIE SPEIER, California
TREY GOWDY, South Carolina JIM COOPER, Tennessee
DENNIS A. ROSS, Florida
C O N T E N T S
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Page
Hearing held on:
September 22, 2011........................................... 1
Appendix:
September 22, 2011........................................... 55
WITNESSES
Thursday, September 22, 2011
Becker, David M., former General Counsel, U.S. Securities and
Exchange Commission............................................ 33
Kotz, H. David, Inspector General, U.S. Securities and Exchange
Commission..................................................... 8
Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange
Commission..................................................... 6
APPENDIX
Prepared statements:
Neugebauer, Hon. Randy....................................... 56
Becker, David M.............................................. 58
Kotz, H. David............................................... 71
Schapiro, Hon. Mary L........................................ 92
POTENTIAL CONFLICTS OF INTEREST
AT THE SEC: THE BECKER CASE
----------
Thursday, September 22, 2011
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
joint with the
Subcommittee on TARP,
Financial Services and Bailouts
of Public and Private Programs,
Committee on Oversight
and Government Reform,
Washington, D.C.
The subcommittees met, pursuant to notice, at 2:56 p.m., in
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the Subcommittee on Oversight and Investigations,
Committee on Financial Services] presiding.
Members present from the Subcommittee on Oversight and
Investigations: Representatives Neugebauer, Fitzpatrick,
Pearce; Capuano and Miller of North Carolina.
Members present from the Subcommittee on TARP, Financial
Services and Bailouts of Public and Private Programs:
Representatives McHenry, Guinta, Buerkle; Quigley and Maloney.
Ex officio present: Representatives Issa and Cummings.
Also present: Representatives Garrett and Ackerman.
Chairman Neugebauer. The hearing will come to order. This
is a joint hearing. I am proud to have my colleagues from the
Committee on Oversight and Government Reform joining us in this
joint hearing of the Subcommittee on Oversight and
Investigations of the Committee on Financial Services and the
Subcommittee on TARP, Financial Services and Bailouts of Public
and Private Programs of the Committee on Oversight and
Government Reform.
I remind all Members that we may have some Members who want
to join us. We may have some others who join us after the
votes. We are going to try to get the opening statements out of
the way here. I think there will be a vote shortly. I think
there are two votes. We will go do those quickly and then come
back and begin the hearing.
Without objection, all Members' opening statements will be
made a part of the record.
Today, we are having this hearing in order to look into
matters at the SEC on how ethics are handled within the
organization. The Inspector General has just released a report,
and he will go over that. I think one of the things that is
alarming about this hearing today is that the SEC really holds
the entities that they regulate to very high standards,
particularly when it comes to conflicts of interest. And I
think it is extremely important that the organization that
holds others to these standards must have those same standards
within their organization.
As we look at the Inspector General's report, he thinks
there were some holes in that system, and one of the things we
are here for today is to discuss that.
I think it is alarming to find out that someone who may
have had a financial interest in the Madoff settlement was
actually handling many of the very high-level discussions that
were going on at the SEC. Many of us believe that was probably
not appropriate behavior.
As we move forward with this, I think one of the things we
have to understand is that the SEC is entrusted to protect
shareholders and investors, and that some of the behavior that
was going on within the organization would probably be behavior
that would not be tolerated by some of the companies and
entities and individuals that fall under the SEC's
jurisdiction.
Ultimately, I think the findings of the Inspector General,
as we will hear, is that there were some lapses and that there
are some changes that need to be made within the organization,
and that the leadership on this issue really needs to come from
the top. We look forward to hearing from Chairman Schapiro on
some of her reflections on the report and things that she
thinks need to be happening within her organization moving
forward, to make sure these kinds of issues do not happen in
the future.
I think there is a high expectation that this issue will be
dealt with and that hopefully things like this won't happen
again, because this was a very high-profile case to begin with
and had a lot of attention through the Madoff issue; and then
to kind of follow up and find out that within the organization,
we were having lapses in other internal control areas was
somewhat disturbing for a lot of us.
So I look forward to this hearing today.
Now, it is my pleasure to yield 2 minutes to the the
ranking member of the Subcommittee on Oversight and
Investigations, Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman. I would just like to
welcome the people who are going to give testimony today, the
members of the panel. Thank you for being here and thank you
for your patience with our schedule and the demands of our
schedule, which I know you both know.
Obviously, I want to know more about this particular
incident. But I read the report and I actually think it is
pretty clear. I will find it surprising if you shed additional
light. Maybe. For me, everybody make mistakes. Even I have made
an occasional mistake or have interpreted something wrong or
applied something wrong. That is one way to judge people. And
if it is all about perfection, then let anyone who wants to,
stand up and be perfect. That is one part it of the judgment,
though; how bad was it; did innocent people get hurt, and if
they did, what was it? But the other part of the judgment is to
find out what has happened since the problem came to light;
what has been the reaction; has the reaction been proper; has
it been appropriately timed; have innocent people been
protected? Have any wrong decisions been corrected? Again, I
think I know some of these answers, nonetheless, I would like
to hear them today, because to me, that is the real judgment.
Making a mistake is one thing, but how you react to a mistake,
to me, is usually more important.
I look forward to hearing the testimony.
Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
Also, I am pleased to have the chairman of the Oversight
and Government Reform Committee joining us on the panel as
well, Mr. Issa. We appreciate your being here.
I now yield 3 minutes to the chairman of the Subcommittee
on TARP, Financial Services and Bailouts of Public and Private
Programs, Mr. McHenry, whom I look forward to working with on
this hearing. Thanks for your cooperation.
Chairman McHenry. Thank you. Thank you for this joint
hearing today. I want to thank our panel for being here and
complying with our schedule. I certainly appreciate that. I
want to thank you both for your service in government.
In May 2010, then-Ranking Member Darrell Issa released a
report that explained how the SEC's unworkable structure,
lawyer-driven culture, and technological backwardness helped to
cause one of its high-profile failures such as the Madoff
scandal. This joint committee hearing continues the ongoing
efforts of congressional oversight.
The matter at hand today originates with Bernie Madoff's
elaborate Ponzi scheme. Mr. Madoff admitted guilt nearly a
decade after questions had been raised to regulators about the
Madoff firm which operated a Ponzi scheme with over $60 billion
of fraud and thousands of clients. It was clear the SEC's
reputation had taken a blow.
In 2009, Mary Schapiro was named Chairman of the SEC and
stated her commitment to rebuild the SEC's reputation. Soon
after her arrival, she welcomed back David Becker to the SEC as
General Counsel. Upon arriving at the SEC in early 2009, Mr.
Becker informed Chairman Schapiro about his status as a net
winner from a Madoff fraud case. Despite learning this,
Chairman Schapiro never asked Mr. Becker to recuse himself from
Madoff-related matters or to disclose his financial interests.
This was unfortunate and this was a mistake. That is now clear.
Since then, a series of missteps by high-ranking officials
of the SEC, ranging from Mr. Becker's communication with the
SEC's Counsel to his personal participation in matters in which
he had a personal financial interest, have put into question
the reputation of the management and decision-making of the
SEC. That is what this hearing is really about. We also note,
for example, that the SEC's five Commissioners, advised by Mr.
Becker, voted on an issue that affected Mr. Becker's personal
financial interest, and only Chairman Schapiro knew about that,
and perhaps not to the full extent that she now does. Just
yesterday, the SEC's Inspector General referred the Becker
situation case to the Department of Justice.
Chairman Schapiro, you have had a distinguished career. You
have had a long service in government service, and we certainly
appreciate that. We appreciate your contribution to Federal
service. You have a wonderful reputation.
What is clear about this situation is that you did make a
mistake. You admitted such, and you said had you known then
what you know now, you would have acted differently. What we
want to know in terms of Federal congressional oversight is how
we prevent this from happening again; what policies are you
going to put in place, what actions you have taken, and what
actions you will take going forward to make sure this never
happens again?
Thank you for being here. Thank you for your testimony. And
thank you for your service.
Chairman Neugebauer. I thank the gentleman. I yield 2\1/2\
minutes to the gentleman, Mr. Quigley.
Mr. Quigley. Thank you, Mr. Chairman. Earlier this year,
this subcommittee held a similar hearing on the SEC. At that
hearing, we acknowledged a number of issues facing the SEC,
including budget cuts and the ability of the SEC to complete
its responsibilities after they are done. We also discussed
internal challenges, including the David Becker potential
conflict of interest in handling high-profile cases. But at
that time, at our last hearing, we didn't have the benefit of
the extensive record that we do now, thanks to the Inspector
General's report.
In order to fairly address this important issue and restore
the public's confidence in the SEC, we welcome a thorough
discussion of these matters. To that end, we also welcome the
voluntary appearance of David Becker and hope his testimony
will advance our discussion.
This case exemplifies how even the appearance of
impropriety can undermine public confidence in vital
institutions like the SEC. According to the Inspector General,
``Becker participated personally and substantially in
particular matters in which he had a personal financial
interest.'' That demonstrates the importance of transparency
and of ethical decision-making in the agency process, an
imperative for an objective, independent, and competent Ethics
Counsel at all government agencies.
In closing, I look forward to this discussion as well as
our consideration of the Inspector General's recommendations
for reforming the SEC's Ethics Office. I would also like to
observe that Chairman Schapiro deserves credit for steps she
has already taken to deal with this issue and future issues.
She called for the Inspector General's investigation and has
moved to revamp the SEC's Ethics Office. I hope we can build on
her work and restore trust in the SEC, a vital public
institution that is critical to the soundness of our financial
markets.
Thank you, and I yield back.
Chairman Neugebauer. I thank the gentleman.
The chairman of the Committee on Oversight and Government
Reform, Mr. Issa, is recognized for 2 minutes.
Chairman Issa. Thank you, Mr. Chairman. Thank you for
convening this joint hearing today. It is in fact always a
pleasure to see Chairman Schapiro. We consider her to be a
consummate professional who, as Chairman McHenry said, has made
a mistake.
Also, I would like to welcome Inspector General Kotz. Your
report is important to the reform that this joint group wants
to do. I recognize that although the reform is in the name of
our committee, ultimately a great deal of what is going to be
done, overseen, and fixed will be under the Financial Services
Committee.
We are deeply concerned that we now have had two strikes on
Bernie Madoff; that in fact today many of my questions will be
not only how did it happen, but how are we going to make sure
we don't have a third. It is extremely important that this
committee, this joint effort, begins looking and saying, how do
we get the maximum confidence in the process; how do we get
capital moving again; because ultimately, dollars sitting on
the sideline is in fact a national problem. And there is no
better place to ensure the confidence comes back than to our
public market.
So I look forward to the hearing. It is going to be tough.
There are going to be tough questions because mistakes were
made.
Mr. Chairman, as you know, our committee is also working on
``Operation Fast and Furious'' with a different part of
government in which they are still claiming that no problem
really occurred; that it was simply a botched operation. This
was not a botched operation. There were mistakes made that we
have to ensure do not happen in the future as a process, not
just for individuals. So I thank you for holding this hearing
and I look forward to the questions and answers, and I yield
back.
Chairman Neugebauer. I thank the gentleman.
I now am going to yield 2\1/2\ minutes to the gentleman,
Mr. Cummings.
Mr. Cummings. Thank you, Mr. Chairman, for calling today's
hearing, and I welcome the opportunity to work with the members
of the House Financial Services Oversight and Investigation
Subcommittee on this very important issue.
The IG report, which I commend Chairman Schapiro for
requesting, clearly describes a procedural breakdown within the
SEC's ethics process that undermines the public's trust not
just in the Madoff matter but also in any other matter before
the Commission. This is simply unacceptable.
The victims of the Madoff scheme deserve to know that the
SEC's decision in this case was not tainted by conflicts of
interest. I am heartened by reports that Chairman Schapiro has
already adopted the IG's recommendations to revisit the SEC's
position regarding the method used to calculate the value of
each Madoff victim's accounts, a method that was advanced by
Mr. Becker and adopted by the SEC.
I am also encouraged that Chairman Schapiro took action
last year to overhaul the Ethics Office, hire new Ethics
Counsel, and provide the office with greater resources.
However, I, like other members of this panel, continue to
have grave concerns and serious questions about the procedural
breakdown in the SEC's ethics process. It is so important that
we reestablish trust in this very important office.
Ms. Schapiro, you have said it yourself, that trust is very
very important for everything you do. There are so many
Americans who are depending on this office to do the right
thing, and they have to know that things are functioning the
way they are supposed to function. And so I look forward to
your testimony, and thank you again, Mr. Chairman.
With that, I yield back and I look forward to the
testimony.
Chairman Neugebauer. I thank the gentleman.
Mrs. Maloney is recognized for 1 minute.
Mrs. Maloney. Thank you, Mr. Chairman, and ranking members,
for calling this important hearing on the potential conflicts
of interest at the SEC and the Becker case. This is an
important case. But even more important than this are the steps
we can take to prevent a Bernie Madoff scheme from happening
again and hurting American taxpayers.
The Dodd-Frank Act implemented a strengthened public
accounting board, strengthened independent auditors, because
the information in the accounts were fraudulent in the Madoff
case. It strengthened whistle-blower protections, it lowered
the aiding and abetting standard, and it strengthened the
requirement that examiners talk to law enforcement in order to
move forward. I very much agree with the IG's recommendation
that the vote should be reconsidered in a process that is free
from any possible bias or taint.
I look forward to hearing from you, Chairman Schapiro, on
what steps you are taking to ensure that this time the Madoff
victims and the American people can be confident that this
process is untainted and unbiased. Our markets run more on
trust than on capital, and restoring trust is extremely
important. This is an important hearing.
Thank you, Mr. Chairman. I yield back.
Chairman Neugebauer. I thank the gentlewoman.
Our first panel consists of: the Honorable Mary Schapiro,
Chairman of the U.S. Securities and Exchange Commission; and
Mr. David Kotz, Inspector General of the U.S. Securities and
Exchange Commission. Without objection, your written statements
will be made a part of the record and you will be recognized
for 5 minutes to summarize your testimony.
STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, U.S.
SECURITIES AND EXCHANGE COMMISSION
Ms. Schapiro. Chairmen Neugebauer and McHenry, Ranking
Members Capuano and Quigley, and members of the subcommittees,
thank you for inviting me to testify regarding the report of
the Securities and Exchange Commission's Inspector General
concerning the Commission's former General Counsel, David
Becker. Last March, I requested that the IG conduct this
review. I wanted to ensure that there was an independent
analysis of all relevant facts surrounding Mr. Becker's
involvement in Commission matters relating to SIPC's
liquidation of the Madoff broker-dealer. Among other things,
the IG identifies concerns about Mr. Becker's participation in
the Commission's resolution of those issues, and also makes a
number of recommendations, several of which propose ways to
improve the Commission's already much-improved Ethics Office.
The Commission's new Ethics Counsel and I concur in those
recommendations and agree on the need to take immediate steps
to implement them.
The IG also has indicated he will refer, or has referred,
the results of his investigation to the Department of Justice.
While it would be inappropriate for me to comment on that
referral, I can talk about what I recall of Mr. Becker's
communications to me soon after I became Chairman in January of
2009.
Mr. Becker informed me that his mother had had an account
with Madoff before she died, and that it had been closed a
number of years before he returned to the agency. At the time,
I was focused on identifying and remediating failures in the
agency that had allowed the fraud to go undetected for many
years, and I was focused on the plight of the many victims,
some of whose heartbreaking letters I had recently read. It
simply did not occur to me then that his deceased mother's
account, closed years ago, could present a financial conflict
of interest.
There were a number of important facts about Mr. Becker's
situation that I did not either know or appreciate at the time;
principally, that he personally could be subject to a clawback
suit or that the resolution of the SIPC issues affecting the
victims of the Madoff fraud could potentially affect his
financial interest. What I did know is that Mr. Becker was a
dedicated public servant and experienced attorney who had ably
served as General Counsel to three Chairmen.
As compliance with ethical obligations is each employee's
responsibility, I assumed that he would seek guidance from the
agency's Ethics Counsel, and, indeed, the IG's report describes
how Mr. Becker did that on two separate occasions. But while I
understand that Mr. Becker did obtain clearance from the Ethics
Counsel, I also realize that as Chairman, I need to have a
broader vision that goes beyond what may be required in any
situation. On such matters I need to be acutely sensitive to
any issue that could potentially distract from the Commission's
ability to fulfill its mission with the full confidence of the
investing public.
I was sworn in as Chairman on January 27, 2009, a month-
and-a-half after Madoff was arrested. My highest priority at
that time was to make whatever changes were needed to ensure
that another Madoff could never happen again. But I was equally
concerned about how to provide the most effective relief for
the Madoff victims, so that within the contours of the law, we
could get the most money to investors who were literally losing
their homes. That issue crystalized for the Commission around
the question of how the bankruptcy court presiding over the
liquidation should calculate the net equity in a Madoff
victim's account.
In December 2009, after internal discussions and a vote,
the Commission expressed its position to the bankruptcy court.
The Commission's position had two components. First, the
Commission determined that due to the nature of Madoff's fraud,
customers' net equity could not be based on the fictitious
amounts shown on their final account statements. Instead, they
should be measured by their net investment with Madoff--the
money-in/money-out approach.
Second, given the extraordinary duration of the fraud, the
Commission concluded that the way to treat different
generations of victims most fairly was to adjust their claims
to account for the effects of inflation over time, what we call
the constant-dollar approach.
The bankruptcy court has ruled on the first question,
agreeing with the money-in/money-out approach, a decision that
the Second Circuit Court of Appeals recently affirmed. The
bankruptcy court, however, has not yet addressed whether the
customers' claims should be measured in constant dollars. The
IG recommends that the Commission conduct a re-vote on its
determination that Madoff customers' net equity be calculated
in constant dollars. I agree that a re-analysis and a re-vote
of this issue is appropriate.
The report also discusses a decision in late 2009 to have a
witness other than Mr. Becker testify on behalf of the
Commission at a congressional hearing concerning the
Commission's views on how net equity should be determined in
Madoff. The witness at that hearing was there to represent the
Commission's legal and policy position on a complex, novel
question of law.
When this issue arose, I believed, were Mr. Becker to be
the witness, he should disclose to the subcommittee that his
mother had had an account. Thereafter, it was suggested to me
that, notwithstanding Mr. Becker's clearance by Ethics Counsel,
his participation could distract from the core legal and policy
positions of the Commission, and that therefore our Deputy
Solicitor, an experienced litigator and the principal attorney
on the Madoff liquidation matters, should be the Commission's
witness. And I concurred.
Ensuring that the agency has the strongest possible ethics
program has been a priority of mine. Over the past 2 years, we
have revamped the structure, function, and personnel of the
Commission's Ethics Office. The IG report makes recommendations
on ways to further improve our ethics program, including having
the Chief Ethics Counsel report directly to the Chairman
instead of to the General Counsel. Notwithstanding the
improvements we already have made, I recognize there is more
that can be done, and we will take immediate steps to implement
the report's recommendations.
I am proud of how much we have accomplished at the SEC over
the past 2\1/2\ years and I am proud to have the opportunity to
work alongside an extraordinary staff who work tirelessly to
protect investors in the markets. Critical to the performance
of our mission is protecting the integrity--and the perception
of integrity--of our decisions and our processes. I can say to
you with assuredness that we have learned from this experience
and are taking and will continue to take all actions necessary
to earn and maintain the trust the public places in us.
Thank you for the opportunity to be here today. I am happy
to answer your questions.
[The prepared statement of Chairman Schapiro can be found
on page 92 of the appendix.]
Chairman Neugebauer. Thank you.
Mr. Kotz, you are recognized for 5 minutes.
STATEMENT OF H. DAVID KOTZ, INSPECTOR GENERAL, U.S. SECURITIES
AND EXCHANGE COMMISSION
Mr. Kotz. Thank you for the opportunity to testify before
the subcommittees on the subject of potential conflicts of
interest at the SEC, the Becker case, as the Inspector General
of the United States Securities and Exchange Commission.
On March 4, 2011, Chairman Schapiro requested that my
office investigate any conflicts of interest arising from the
participation of David Becker, the former General Counsel and
senior policy director of the Commission, in determining the
SEC's position in the liquidation proceeding brought by the
Securities Investor Protection Corporation, SIPC, of Bernard L.
Madoff Investment Securities, the Madoff liquidation. The
Chairman's request came after she received congressional
inquiries prompted by press reports beginning on February 22,
2011, that the trustee administering the Madoff liquidation had
brought a clawback suit seeking to recover fictitious profits
that had accrued to Mr. Becker and his brother as beneficiaries
of their mother's estate when a Madoff account she held was
liquidated after her death. We opened an investigation that
same day we received the Chairman's request.
During the course of our investigation, we obtained and
searched over 5.1 million emails for a total of 45 current and
former SEC employees for various time periods pertinent to the
investigation, ranging from 1998 to 2011. We also obtained and
analyzed internal SEC documents, documentation provided by the
Madoff trustee, court filings, and press reports. In addition,
we conducted testimony or interviews of 40 witnesses with
knowledge of relevant facts or circumstances surrounding the
matter.
On September 16, 2011, we issued to the Chairman of the SEC
a comprehensive report of our investigation in the conflict of
interest matter that contained nearly 120 pages of analysis and
200 exhibits. Overall, the OIG investigation found that Mr.
Becker participated personally and substantially in particular
matters in which he had a personal financial interest by virtue
of the inheritance of the proceeds of his mother's estate's
Madoff account and that the matters on which he advised could
have directly impacted his financial position.
We found that Mr. Becker played a significant and leading
role in the determination of what recommendation the staff
would make to the Commission regarding the position the SEC
would advocate as to the calculation of a customer's net equity
in the Madoff liquidation.
Under the Securities Investors Protection Act of 1970,
SIPA, where SIPC has initiated the liquidation of a brokerage
firm, net equity is the amount that a customer can claim to
recover in the liquidation proceeding. The method for
determining the Madoff customer's net equity was therefore
critical to determining the amount the trustee would pay to
customers in the Madoff liquidation.
Testimony obtained from SIPC officials and numerous SEC
witnesses, as well as documentary evidence reviewed,
demonstrated that there was a direct connection between the
method used to determine net equity and clawback actions by the
trustee, including the overall amount of funds the trustee
would seek to claw back and the calculation of amount sought in
individual clawback suits.
In addition to his work on the net equity issue, we also
found that Mr. Becker, in his role as SEC General Counsel and
Senior Policy Director, provided comments on a proposed
amendment to SIPA that would have severely curtailed the
trustee's power to bring clawback suits against individuals
like him in the Madoff liquidation.
After we concluded the fact-finding phase of our
investigation, we provided to the acting Director of the Office
of Government Ethics, OGE, a summary of the salient facts
uncovered in the investigation as reflected in our report.
After reviewing the summary of facts we provided, the acting
Director of OGE advised us that in his opinion, as well as that
of senior attorneys on his staff, Mr. Becker's work both on the
policy determination of the calculation of net equity in
connection with clawback actions stemming from the Madoff
matter and his work on the proposed legislation affecting
clawbacks should be referred to the United States Department of
Justice for consideration of whether Mr. Becker violated 18 USC
Section 208, a criminal conflict-of-interest provision.
Based on this guidance from OGE, we have referred the
results of our investigation to the Public Integrity Section of
the Criminal Division of the United States Department of
Justice.
Based on the findings in our report, we have also
recommended that in light of David Becker's role in signing an
advice memorandum and participating in an executive session at
which the Commission considered the recommendation that the
Commission take the position that net equity for purposes of
paying Madoff customer claims should be calculated in constant
dollars by adjusting for the effects of inflation, that the
Commission should reconsider its position on this issue by
conducting a re-vote in a process free from any possible bias
or taint.
We have also made several recommendations with respect to
the Ethics Office, including that the SEC Ethics Counsel should
report directly to the Chairman rather than to the General
Counsel, and that necessary steps, including the implementation
of appropriate policies and procedures, be taken to ensure
that: one, objective, complete, and consistent ethics advice is
provided; two, ethics officials have all the necessary
information in order to properly determine if an employee's
proposed actions may violate rules or statutes or create an
appearance of impropriety; and three, all ethics advice
provided in significant matters such as those involving
financial conflict of interest are documented in an appropriate
and consistent manner.
I am confident that under Chairman Schapiro's leadership,
the SEC will review our report and take appropriate steps to
implement our recommendations to ensure that the concerns
identified in our investigation are appropriately addressed. I
also believe the fact that the Chairman asked my office to
conduct this investigation, and we completed an exhaustive
investigation and issued a thorough and comprehensive report in
a timely fashion, demonstrates that the Inspector General
process within the SEC is working effectively.
In conclusion, I appreciate the interest of the chairmen,
the ranking members, and the subcommittee and the SEC and my
office and, in particular, in the facts and circumstances
pertinent to our conflict-of-interest report. I will be happy
to answer any questions. Thank you.
[The prepared statement of Inspector General Kotz can be
found on page 71 of the appendix.]
Chairman Neugebauer. Thank you.
We will now go to questions from the members. Each member
will be recognized for 5 minutes. I recognize myself for 5
minutes.
Ms. Schapiro, you advised Mr. Becker that he would have to
disclose his interest in the Madoff interest if he testified
before Congress, but you didn't feel it was necessary to
disclose information before the Commission when Mr. Becker made
a presentation on his proposed formula for the liquidation. I
am a little confused as to why you felt that it was important
that he disclose that to Congress but not disclose it to
Commission members. Can you shed some light on that for me?
Ms. Schapiro. I would be happy to, Mr. Chairman. I thought
it was very important that any information be disclosed to
Congress in the context of his potentially being a witness, so
there would not be any surprises. He apparently did not tell
the Commissioners, and it frankly did not occur to me to
directly tell the Commissioners, because generally it is not
our practice to tell the Commission or to talk about it when
somebody does not have a conflict of interest and Ethics
cleared that he did not have a conflict of interest from
appearing and that he did not need to recuse. So we generally
haven't told people when somebody is not recused.
I wish that he had told them. After we all learned,
obviously, from reading the newspaper that he had in fact been
sued in a clawback suit, and, myself included, were very
surprised by this news, I did go to each Commissioner and
apologize to them for not having thought to direct David to do
exactly that and inform them of it. But it simply was because
we just don't have a practice of telling people when somebody
is not recused.
Chairman Neugebauer. I think one of the issues about this
hearing is that some of these practices that were in place at
the Commission seem to be the problem. There wasn't that much
distance in time between when the Commission voted and when Mr.
Becker was asked to potentially testify before Congress. So in
a short period of time, we had an epiphany that, oh, maybe we
should start telling people about this.
I think Commissioner Aguilar expressed extreme
disappointment--I think ``incredibly disappointed'' were the
words he used--that he was not made aware of the conflict that
existed. So I think that is one of the things we are talking
about today; we are going to hear people say that it didn't
seem important.
You did mention that when you originally reached out to Mr.
Becker, he disclosed that to you. You had just been made the
SEC Chairman at a time when a very high-profile case was
something you knew you had to address, and yet one of the
people you brought into a senior staff position was someone who
said, ``You know what? I may have a conflict here. My family
had an account with Madoff.''
I guess the question is: Did you make the decision to pull
Mr. Becker as the witness when he was going to testify?
Ms. Schapiro. Mr. Chairman, the decision about who would
testify was actually made by our Legislative Affairs Office,
but I did concur in it. The staff came to the conclusion that
it could potentially be a distraction to have this disclosure,
even though it had been cleared by Ethics. It was a public
forum, and it was likely to divert attention from the really
important technical legal issues that the subcommittee was
trying to explore at that hearing.
In addition, Mr. Becker had never testified before. And I
think there were some concerns about whether he would be a very
good witness. We had a second great choice in our Deputy
Solicitor, who was in fact deeply involved in the Madoff
litigation issues. So I was comfortable with David Becker being
the witness, so long as it was being disclosed, but I was
comfortable with the determination that he might not be the
best witness. And our goal was to put the best witness in front
of Congress to explain the Commission's legal and policy
analysis.
Chairman Neugebauer. I am just curious why you weren't
comfortable saying to Mr. Becker, when you make your
presentation to the Commission--if it is relevant for a person
who is testifying before Congress, I would think it is also--
these Commissioners, you all are charged with making very
important decisions--why it wasn't relevant for you to disclose
that, or for Mr. Becker to disclose that to the Commission
members when he made his presentation?
Ms. Schapiro. Of course. Had I thought of it, I would have
directed him to do that. It didn't occur to me. I was thinking
about this in the context of the testimony, and I wasn't
thinking separately about the context of disclosing it to the
Commissioners. There certainly was no intention to hide it, and
I wish it had been disclosed. That is one reason why I think it
is important that we do a re-analysis and re-take the votes so
that there can be no question, before the court actually
considers this issue, about whether there was any taint to the
decision.
Chairman Neugebauer. Thank you. My time has expired. Mr.
Capuano?
Mr. Capuano. Thank you, Mr. Chairman. Mr. Kotz, did you
make specific enumerated suggestions on how to address the
problems that you found?
Mr. Kotz. Yes, we did. As indicated, we first had the
recommendation that the entire process be reconsidered and that
a re-vote be taken.
Mr. Capuano. Did you make a number of specific
recommendations?
Mr. Kotz. Yes.
Mr. Capuano. How many recommendations did you make,
approximately? Do you know?
Mr. Kotz. Four separate recommendations. We made three
separate recommendations with respect to the Ethics Office and
then a recommendation overall about the process.
Mr. Capuano. So, four specific recommendations. Usually,
the way these things work is you make a recommendation--not
you, but any IG makes a recommendation, and whomever they are
recommending to has a response. Was there any disagreement with
any recommendations you made?
Mr. Kotz. No. We follow up. We actually ask for a
corrective action plan to demonstrate that the recommendations
have been implemented. But in this case, the Chairman has
already indicated that she plans to implement the
recommendations.
Mr. Capuano. So, to your knowledge, everything that you
recommended has either been done or is being done?
Mr. Kotz. Correct.
Mr. Capuano. Do you have any plans to do a follow-up to
that in a month, 6 months, or a year from now, to see if they
have in fact been implemented?
Mr. Kotz. We may do a follow-up to look at the Ethics
Office overall. It will depend on the information we get about
the recommendations being implemented. But if there is any
question about the complete and full implementation of the
recommendations, we will follow up.
Mr. Capuano. Ms. Schapiro, would you have any objections to
a follow-up again in 6 months or a year from now?
Ms. Schapiro. No. I would actually welcome it, because we
have made some very significant changes in our Ethics Office
and I think it would be very valuable to have the IG's
perception of whether those are effective and the appropriate
changes to have made.
Mr. Capuano. Again, obviously, there were mistakes made. We
all know that. I actually commend you, Madam Chairwoman, for
accepting the fact that you made mistakes. It is hard to do. I
have done it. It is hard to do. At the same time, I also
commend you, and commend you, Mr. Kotz, for making positive
recommendations out of a bad situation. And hopefully, this
will be better. My expectation is that not only will the
process be better, but the implementation of the process. You
can have the best processes in the world, but if they are not
implemented properly and they are not taken seriously--not just
at the SEC, but anywhere--they are worthless.
Again, that is what I came for, to make sure that there
seems to be no malice here. There seem to be screw-ups. But the
screw-ups seems to have been addressed. And they are being
addressed. I would strongly suggest, Mr. Kotz, that you do a
follow-up, even if you don't think it is necessary. If the
Chairwoman has no problem--whether she is the Chairwoman a year
from now, who knows--if not you, then your successor, do the
follow-up. Even if it is a 1-page follow-up saying, everything
is great, or if it is a 1-page follow-up that says, nothing has
been done, it will certainly make me feel better and hopefully
it will put a final period at the end of this particular issue.
Mr. Kotz. We will do that.
Mr. Capuano. With that, I yield back.
Chairman Neugebauer. I thank the gentleman. Now, Mr.
McHenry is recognized for 5 minutes.
Chairman McHenry. Thank you for your testimony. Chairman
Schapiro, thank you for the work you have rendered to your
government and your service. As I said, this is an unfortunate
situation. There are a few things that we have in terms of what
appeared to happen. I just want to confirm that those are in
fact the case. You can answer how you see fit.
When Mr. Becker returned to government service in about
February of 2009, he disclosed that his late mother's account
was in fact a Madoff account. Did you ask him to recuse himself
from Madoff-related issues at that time?
Ms. Schapiro. No, I didn't.
Chairman McHenry. Why?
Ms. Schapiro. Because he had told me his mother had had an
account years ago; that she had passed away 5 or 6 years before
he returned to the Commission. I don't remember the exact
number. The account had been closed. It seemed to me to be so
very remote to anything we were working on at that time.
If I can give you have a little context, I had just arrived
at an agency that was in disarray, quite honestly, and deeply
demoralized. We were coming out of a financial crisis. There
were a thousand things to do. There was virtually no senior
staff on board. And I was focused on lots of other things. And
I was also focused on trying to get the maximum amount of
allowable recovery to victims who had nothing; who had lost
everything; not people whose accounts had been closed 5 or 6
years before, but people who were literally moving into their
children's basements because they lost their homes because of
what this man did. And I was not thinking about David Becker's
deceased mother's account through any of this.
I assumed that as an experienced government lawyer, he
would go to the Ethics Office, he would do what needed to be
done, and make a decision about his participation. But
honestly, it seemed so remote to me to the issues that the
agency was facing at that moment coming out of the failure to
stop the Madoff Ponzi scheme.
Chairman McHenry. You understand the account valuation
method would determine how these clawbacks would function. And
you also knew that he had an account that could possibly be
subject to clawbacks. Why didn't you ask him to recuse himself
at that time?
Ms. Schapiro. Sir, not really then did I understand that.
At that time we weren't thinking about people whose accounts
had been closed years before. We were thinking about people who
were in extremis right at that moment, who needed to have funds
returned to them as best could be done as a result of the
fraud. So I wasn't connecting clawbacks to the issues we were
facing at that particular moment. I certainly wasn't thinking
about what was going on with his, again, deceased mother's
account from years before. I just wasn't connecting those dots
and I didn't have that kind of information.
Frankly, I didn't even know how much was in the account,
whether it had earned a lot of money or a lot of money had been
taken out. I just didn't have that kind of detail. And
certainly, I didn't know that he could be subject or that
account could be subject to a clawback at that time.
Chairman McHenry. According to the notes that were part of
this report, you in fact did know about this; is that correct,
Mr. Kotz?
Mr. Kotz. Our report showed that when David Becker
initially had a conversation with Chairman Schapiro, it wasn't
necessarily clear that he told her that he could be subject to
a clawback suit here. That was some information that he
provided to the Ethics Counsel.
Chairman McHenry. But June of 2009, there are notes that
you are aware that it could affect--
Ms. Schapiro. Mr. Chairman, I was speaking to the time--I
thought you prefaced your question to when he came back to the
Commission in February. At that time, I made absolutely no
connection. I will tell you, though, that those notes reflect a
discussion with staff in preparation for a meeting with the
management of SIPC about the different methodologies that could
conceivably be used: last account statement; money-in/money-out
or money-in/money-out in constant dollars. And there is a note
that says clawbacks are not possible under the broader
approach, I believe.
I still will tell you I wasn't connecting that and hadn't,
frankly, thought about his mother's account in many, many
months. It was a moment in time when he mentioned it to me in
February, and I just didn't think of it again in that context.
Chairman McHenry. Let me ask you a different question, Ms.
Schapiro. Have you recused yourself? In your time in public
service, have you taken it upon yourself to recuse yourself?
Ms. Schapiro. Absolutely.
Chairman McHenry. Absolutely. So you had the judgment to do
this, and you assumed that Mr. Becker had the same judgment.
Ms. Schapiro. Each employee's ethical obligations are their
own. And their duty is theirs.
Chairman McHenry. And here's the challenge. What is the
process to put in place to ensure this doesn't happen again? I
appreciate the fact you have taken the IG's recommendations and
accepted them. What are you going to do, going forward, to
ensure this doesn't happen again?
Ms. Schapiro. Mr. Chairman, we have a significantly
stronger Ethics Office today, I believe, than maybe at any time
in recent history. In fact, our new Chief Ethics Officer is
here with me today. We have new leadership at the highest level
of the Ethics Office. We have allocated additional resources to
that function.
We have the first Chief Compliance Officer ever at the SEC
operating in that office. We have had a significant expansion
of the education of employees and training of employees about
these kinds of issues. We have a new ethics handbook that has
been released to employees. And we have a number of ongoing
initiatives through the Ethics Office, including much more
rigorous and routine consultation with the Office of Government
Ethics on issues as they come up so that we are getting a bit
broader input into these more technical or more difficult
decisions.
I think across-the-board, we have strengthened this office.
And we are doing it very much with the goal of preventing
exactly this kind of thing from happening, which distracts us
from important work we have to do.
Chairman McHenry. Thank you.
Chairman Neugebauer. I thank the gentleman.
Mr. Quigley for 5 minutes.
Mr. Quigley. Thank you, Mr. Chairman. Let me ask that
question in a different light, for either one of you. Walk us
through the scenario of what happened with Mr. Becker and why
the new and improved system would catch this before it gets
this far. At what point and why would the current system,
training, education, what have you, have stopped this
particular instance?
Ms. Schapiro. I might let the Inspector General speak to
walking through with Mr. Becker. I can say that I believe now
somebody coming to the Ethics Office with a question like
this--first of all, I believe my sensitivity to the sort of
toxic nature of anything related to this is heightened. But
even if I don't know about it--and we have 3,800 employees--I
don't know about everybody's ethical calculations that they
have to make about whether they can participate in a matter.
But going to the Ethics Office now, we have centralized all of
our ethics guidance under the Ethics Officer. They would get a
more collaborative look, much more required information and
documentation about all of the issues that surround the ethical
question. There might be consultation with the Office of
Government Ethics about whether it would be appropriate for a
person to participate or not participate. There would be
documentation of the advice that is given, so that if the issue
comes up again, we can be consistent in the advice that is
rendered.
Mr. Quigley. When you get put in a position like his,
aren't there written documents about his financial situation
and his family so this would be caught automatically?
Ms. Schapiro. I believe that because this was so long ago--
and I don't know this, so I am surmising--it would not have
been captured in current financial disclosure documents.
Mr. Quigley. Have you altered the financial disclosure
document for your agency, Mr. Kotz, that would get to this sort
of thing, recognizing now that the recent past may not be far
enough back?
Mr. Kotz. I think that is a very good idea. The other point
I would make in terms of how things would be different,
implementing our recommendation that the Ethics Counsel should
report directly to the Chairman I think would change things.
We had great concerns about the process used where David
Becker went to a subordinate and got the advice with respect to
whether he had to recuse himself from that matter. Several
months later, he performed a performance evaluation of this
individual. And so, I have to think there is a concern about
when you have to give ethics advice for your boss where it is a
matter that a person wants to work on. So if you move that
person out from under the General Counsel, then I think in this
case the ethics official who makes the decision would maybe
feel more comfortable giving appropriate advice. I think if
that recommendation is implemented, which I understand it will
be, that that could potentially make a significant difference.
Mr. Quigley. You mentioned this as potentially a good idea.
How far back do you go now on your current recommendations in a
person's financial background, who make decisions like Mr.
Becker was?
Mr. Kotz. There are Office of Government Ethics forms that
everyone fills out government-wide, and it has current
interests that you have for that year, so as long as you
continue an interest. I think that perhaps since this was his
mother's account, the estate's account, that it may not have
been picked up for that purpose. That may be something that
needs to be looked at to add to the financial disclosure form,
because obviously if you are inheriting money, it becomes
yours.
Mr. Quigley. Right. It may not apply to all government
employees, but clearly with the decisions like Mr. Becker's,
the people in those positions may have to have a different sort
of form.
Mr. Kotz. I agree. There should certainly be a heightened
standard for a senior person in an agency like the SEC. The SEC
holds itself out--its code holds itself out for the highest
level of integrity. I think that is an important standard that
the SEC has to keep.
Ms. Schapiro. Congressman, if I could just add, I think one
of the important things we can do, and it goes back to the
comment about setting the tone at the top, is really
heightening our employees'--all of our employees'--awareness to
the impropriety or the appearance issues generally. The current
Ethics Office is very engaged in exactly that kind of education
of our employees.
Mr. Quigley. I appreciate that. Mr. Kotz, a final point.
The recommendation that was made to refer this to the Justice
Department--that decision, how was it, if at all, influenced by
the fact that you had made this decision after getting advice
from legal counsel within the SEC?
Mr. Kotz. According to the regulation, that is a factor
that the Justice Department looks at in determining whether to
bring a case. But that is not an absolute bar. In other words,
notwithstanding the fact that you have sought ethics advice,
that is not a bar to engaging--
Mr. Quigley. Not only sought it, but you got advice.
Mr. Kotz. That is right. We provided that information to
the Office of Government Ethics, and their determination was it
still should be referred to the Department of Justice.
Mr. Quigley. Given that this was a goof-up on many levels
that compounded itself, it seems to have a very chilling impact
on people in the future that maybe they can't necessarily rely
upon this advice and not worry about their own situation a
little more personally.
Mr. Kotz. I think that is why it is very important that the
Ethics Officer gives appropriate consistent advice. And that is
one of the reasons why we have made recommendations to the
Ethics Office, because you are right; people are relying on
this and they need to make sure that they are getting the
appropriate advice so they don't get into trouble because of
something that somebody said that may not have been entirely
accurate.
Mr. Quigley. Thank you, Mr. Chairman.
Chairman Neugebauer. Mr. Issa is recognized.
Chairman Issa. Thank you, Mr. Chairman.
Mr. Kotz, I am going to follow up right where that left
off. If I give you bad information about something, I want an
ethics opinion on, and you give me a clean bill of health, that
doesn't preclude later recrimination, right?
Mr. Kotz. Absolutely. Because in that case you could use
the process to get yourself out of some later recrimination.
Chairman Issa. Ultimately, Mr. Becker, whom we will hear
from later, is a senior attorney with independent knowledge of
many things, including, quite frankly, he is a member of the
bar. These are independent actions which the Justice Department
is going to look at--whether he knew himself.
Mr. Kotz. In fact, he was the alternate designated agency
ethics official.
Chairman Issa. Thank you. You have taken me to the next
question, which is: Inherently throughout government, not just
in whatever Ms. Schapiro wants to fix, but throughout
government, don't we have a need for a greater level of
independence that, in fact, the head of all the lawyers whom in
fact may have lots of lawyers working with them and so on, who
goes to another person who works for them for an ethics
opinion, isn't that a level of independence that is government-
wide to be re-thought by this committee?
Mr. Kotz. I think it would apply to other agencies as well.
Absolutely. It is very hard to be completely independent when
you are subordinate to somebody, when they are reviewing and
evaluating you. It is a very difficult thing to do.
Chairman Issa. From your study, from your investigation, is
there an inconsistency in this answer, in your opinion, that
Mr. Becker got versus similar answers that somebody else would
have gotten?
Mr. Kotz. Yes. We do relate some concerns we have about
other individuals where, even with respect to the Madoff
liquidation, there was a much broader request to recuse. And
with respect to Mr. Becker, the determination was one aspect
shouldn't necessarily impact the other. When it came to a
lower-level staff attorney in the office of the General
Counsel, just a small amount of work in her law firm on an
unrelated bankruptcy matter, the determination was made she
should be recused from all Madoff-related activities.
Chairman Issa. So they erred on the side of caution, except
in the case of Mr. Becker.
Mr. Kotz. That was the concern, certainly.
Chairman Issa. Madam Chair, you oversee a great many public
companies. Do those public companies have to declare contingent
assets and contingent liabilities that they have on their
financial statements? In other words, under GAAP accounting,
don't you have to actually disclose the fair contingent
liability or a contingent asset? If you sign, for example--
famously, we are all looking at this in our companies, and I do
have some companies falling under some of these requirements--
if you have a lease, you have a value on that lease, even if
you are making the payment every year. You have to evaluate
that. So all those contingent assets and liabilities, public
accounting is trying to grapple with how to state them,
correct, even though they are not always liabilities that have
any effect this year on the P&L?
Ms. Schapiro. Right.
Chairman Issa. In a sense, for this committee, and
particularly for the reform committee that would be looking
government-wide, shouldn't ethics disclosures very much reach
out and say, what are your contingent liabilities and your
contingent assets? Are you the signer on your child's credit
card; are you the signer on your mother's home?
Aren't those in fact things which could very much affect,
just as Mr. Becker had a $140,000 or so contingent or $130,000-
some contingent windfall if he convinced a standard to be in
his favor?
Ms. Schapiro. I think it is a great question. I think some
of that is actually already required to be disclosed; some of
the things that are not just personal to you, but to your
spouse, your children, trusts you might manage for a disabled
family member, those kinds of things. But I think it is very
much worth looking at because anything that has the potential
to create a conflict of interest, even if it is not directly
owned by you, is something we should be looking at.
Chairman Issa. Mr. Kotz, was there any indication on Mr.
Becker's disclosure of this contingent value or contingent
liability if the Madoff clawback came in?
Mr. Kotz. I think that is an excellent point. In this case
we found that the ethics official's advice was based on some
incorrect assumptions. But we also found that there wasn't an
effort to seek out that contingent information. In other words,
there wasn't an effort when Mr. Becker came in and gave Mr.
Lenox the information to try to understand exactly what this
means, how will this impact this, what if this happens, what if
that happens, just like you are saying, in a contingent
fashion.
Had he done that, he would have seen that there was this
connection between what Mr. Becker was working on and his
financial interests.
Chairman Issa. So the candid disclosure that we expect from
public companies didn't occur in this case.
Mr. Kotz. It did not.
Chairman Issa. Thank you. Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman. Now the
gentleman from Maryland, Mr. Cummings.
Mr. Cummings. Thank you very much. I want to just pick up
where Mr. Issa left off.
Let me make sure I understand this. Having represented a
lot of lawyers in private practice, Mr. Kotz, we had at least
seven SEC officials who had been informed at one time or
another about Mr. Becker's mother's estate account, including
the Chairman, then Deputy General Counsel, the current General
Counsel, the Deputy Solicitor who testified at a hearing in
Becker's stead, the Director of the Office of Intergovernmental
Legislative Affairs, the Special Counsel, the Chairman and two
ethics officials, but none of those individuals saw a duty to
take further action to disclose Becker's interest to others at
the SEC or to see that Becker recuse himself from the Madoff-
related matters; is that correct?
Mr. Kotz. Yes.
Mr. Cummings. And Mr. Issa said something that was very
interesting. He said if somebody gives bad information--and I
am asking you because I am sure Justice is looking at this
hearing--are you saying that Mr. Becker gave any of these folks
bad information? The reason why I am getting at this is because
I want to make sure as other members of this panel have said
that it doesn't happen again and that we do--that your
recommendations are able to catch these kinds of problems from
happening again.
But I can tell you if seven people tell my client to do
something, assuming he hasn't given them bad information, I
have to wonder about that. So you are saying that he--remember,
Mr. Issa talked about bad information. Are you saying that
Becker either did not tell the truth, did not tell the whole
truth? What are you saying?
Mr. Kotz. There was no information that Mr. Becker gave
that was incorrect.
Mr. Cummings. Say that again?
Mr. Kotz. There was no specific information that Mr. Becker
gave that was incorrect. With respect to five of those seven
people, there was very limited information given.
Mr. Cummings. Okay.
Mr. Kotz. So there wasn't a lot of information upon which
you might be able to make that determination. With respect to
the ethics officials, there was more information given. The
ethics officials had a misunderstanding nevertheless of the
gravity of the situation, but no, Mr. Becker did not provide
any false information per se.
Mr. Cummings. All right. And did--so--and one other thing
you said that I was just wondering about. You talked about this
whole thing of people being subordinate, that is, under him,
and you all--with the recommendations I think we have gotten,
we have addressed that. Is that correct?
Mr. Kotz. Yes, they are planning to address that.
Mr. Cummings. Okay. Are you doing that?
Ms. Schapiro. Absolutely. We will change the reporting line
of the Chief Ethics Officer.
Mr. Cummings. And when is that going to happen? You keep
saying we are going to. I thought we had done that.
Ms. Schapiro. It is a matter of however quickly I can get
the Commission approval to do it, but I would say in a matter
of a couple of days.
Mr. Cummings. Oh, good. Would you let us know when that is
done?
Ms. Schapiro. I would be happy to.
Mr. Cummings. Because I think that is very important. But
did you refer anybody else to the Justice Department for
prosecution possibly?
Mr. Kotz. No, no.
Mr. Cummings. I guess what I am trying to get at is that
you imply that somebody, or somebodies, because of their
subordinate position may have done something that was not
proper. Was there any testimony based on what you found of
somebody saying, because this Mr. Becker was my superior that I
felt some kind of pressure or that I needed to do this or is
this your conclusion?
And again, I am just trying to figure out how to make sure
this doesn't happen again.
Mr. Kotz. Yes. Mr. Lenox did not say that he felt pressure.
He did say that part of the factor that he used in making his
determination was how important it was for Mr. Becker, whom he
considered to be a very, very talented individual, to work on
this specific significant matter for the Commission.
Mr. Cummings. I see. And was the ethics advice provided to
Mr. Becker by the SEC's Ethics Counsel at the time demonstrably
flawed?
Mr. Kotz. I believe it was flawed, yes.
Mr. Cummings. Would you agree with that, Ms. Schapiro?
Ms. Schapiro. I think that is actually now a question for
the Department of Justice given the referral. So I would be--
Mr. Cummings. I understand.
Ms. Schapiro. --reluctant to answer that. Congressman,
could I just add one thing--
Mr. Cummings. Please do.
Ms. Schapiro. --about the other employees? I think it is
important to note that it wasn't--they might have known a
little bit. They might have had some understanding that Mr.
Becker's mother had had an account, that he had received ethics
clearance. It wasn't their duty to opine on the ethics of what
he was doing. While I am certainly not condoning anybody
turning their back on a potential conflict, I am not aware of
any of those other employees having done that.
Mr. Cummings. Thank you very much, and thank you, Mr.
Chairman. I yield back.
Chairman Neugebauer. I thank the gentleman, and now the
vice chair of the Oversight and Investigations Subcommittee,
Mr. Fitzpatrick, is recognized for 5 minutes.
Mr. Fitzpatrick. Thank you, Mr. Chairman. Mr. Kotz, in his
email to Mr. Becker clearing him to work on the Madoff victim
formula, the SEC Ethics Counsel did not discuss whether it
would create an appearance of a conflict if Mr. Becker worked
on the Madoff matters. Is a conflict of interest and an
appearance of a conflict of interest the same or are they
different things?
Mr. Kotz. No, they are different, and one should do a
different analysis as to whether there is an actual conflict or
whether there is an appearance issue.
Mr. Fitzpatrick. Can you expand on the differences between
what--how they--
Mr. Kotz. Sure. In fact, the same Ethics Counsel in this
case who did not state in the email to Mr. Becker that he was
doing an appearance analysis actually issued an ethics
NewsGram. He talked about what the appearance analysis would
be, and he actually did it in terms of the New York Times or
Washington Post test: How would it look; what are the optics of
the situation; what is the context of facts and circumstances;
would it pass what has often been referred to as the New York
Times or Washington Post test; if what you propose doing
becomes the subject of an article in the press, would you not
care or would it not look like you were doing something wrong;
even if you wouldn't care, what effect would the story have on
the SEC and your fellow employees.
That was the test that Mr. Lenox himself set forth for
appearances. That is very different from what the Justice
Department is looking at with respect to an actual conflict.
Mr. Fitzpatrick. What would have happened if Ethics Counsel
found, which I believe any reasonable person would have seen,
that there was an appearance of a conflict?
Mr. Kotz. At that point, there could have been a request
made for an authorization or waiver for Mr. Becker to go
forward and work on it, notwithstanding the concern. That would
have had to have been elevated to the Chairman of the agency to
make a determination. All the facts would have had to have been
disclosed to the Chairman in order for her to properly
determine whether that was appropriate. But that was not done
here, and in fact, the appearance issue did not come up in the
email, and there was never an opportunity to look at it
further.
Mr. Fitzpatrick. Mr. Kotz, are you familiar with the
condition of or the state of recordkeeping within the Ethics
Office?
Mr. Kotz. I do know that one of the recommendations we made
was that things be documented more. One of the things that the
previous Ethics Counsel who gave the advice in this case said
was he didn't document generally ethics advice, and we think in
order to ensure that there is consistent advice given to
different people that there be some documentation.
Mr. Fitzpatrick. So you believe that deficiencies in
recordkeeping could result in inconsistent advice?
Mr. Kotz. Yes.
Mr. Fitzpatrick. Were all the staff at the SEC treated the
same?
Mr. Kotz. We found that there were other instances of
individuals who sought ethics advice about the Madoff
liquidation matter for whom there was a much broader analysis
and there were recusals in a much broader way than for Mr.
Becker, which is why we had the concern with respect to Mr.
Becker and Mr. Lenox being a subordinate of Mr. Becker.
Mr. Fitzpatrick. Was there special treatment?
Mr. Kotz. I believe that there were different decisions
made when it came to this decision with respect to Mr. Becker
and when it came to decisions with respect to other employees
in the Office of General Counsel.
Mr. Fitzpatrick. And then if there was an appearance of a
conflict of interest in the Becker case, could he have
continued to work on the matter?
Mr. Kotz. If he had gotten a specific authorization or
waiver to continue to work on that matter.
Mr. Fitzpatrick. And that waiver would have come from whom?
Mr. Kotz. The Chairman.
Mr. Fitzpatrick. Nothing further. Thank you.
Chairman McHenry. Would the gentleman yield?
Mr. Fitzpatrick. Yes.
Chairman McHenry. Thank you. Mr. Kotz, can you document the
Annette Nazareth situation that you have, that you mentioned in
your report?
Mr. Kotz. Sure. In May 2010, Annette Nazareth came
forward--I am sorry, May of 2009--Annette Nazareth, along with
many other lawyers, came forward and wrote a letter to David
Becker requesting that the SEC consider the so-called last
account statement approach. Under the last account statement
approach, fictitious profits would be factored in. Essentially,
Madoff victims would get compensation for the amount of their
fictitious profits. That was a matter that David Becker looked
at, analyzed, and eventually rejected, but it was brought
forward by Annette Nazareth, who was a former Commissioner of
the SEC, and other attorneys representing Madoff victims.
Chairman McHenry. And she, in fact, knew that Mr. Becker
was heir to a Madoff account?
Mr. Kotz. Mr. Becker had informed Ms. Nazareth about his
mother's estate account, yes.
Chairman McHenry. Did that raise concerns?
Mr. Kotz. It did. And we looked at that. We did not find
any evidence of preferential treatment for Ms. Nazareth.
Chairman McHenry. But the appearance.
Mr. Kotz. But the appearance is something that is a
concern, and that is why all of Mr. Becker's activities in this
matter have that appearance concern, and when you have a
situation where you allow something to occur, even in the space
of an appearance issue, there becomes sort of a taint or a
potential bias, and it erodes the credibility of the profits
and that is exactly why these questions are asked. The
Washington Post, New York Times test is one to ensure that
there isn't even the appearance of impropriety, and that was a
concern in this case.
Chairman McHenry. Thank you.
Chairman Neugebauer. The gentleman's time has expired. The
gentlewoman from New York, Mrs. Maloney.
Mrs. Maloney. Chairwoman Schapiro, according to the IG
report, Mr. Becker's alleged conflict of interest in the Madoff
case arose primarily due to his ``significant and leading role
in the determination of what recommendations the staff would
make to the Commission regarding the position the SEC would
advocate as the determination of a customer's net equity in the
Madoff liquidation.''
So the method used to calculate net equity was, and remains
to this day, a critical issue because it dictates how much each
Madoff victim ultimately receives. So, as one who represents
many Madoff victims who lost their homes, lost everything, and
are destitute, this is absolutely critical.
Furthermore, for Mr. Becker's purposes, the method used to
calculate net equity would likely determine whether or not he
was subject to a clawback to recover the $1.5 million in
fictitious profits credited by Madoff to his mother's $500,000
investment, which he then inherited in her estate.
As noted earlier, Mr. Becker rejected the last account
statement method which was advocated by a number of Madoff
clients and, if adopted by the Madoff trustees, would have
likely protected him from the current clawback suit of which he
is now a party. Instead, he recommended that the Commission
adopt the so-called constant dollar method which calculates
each victim's net equity position as the amount they originally
invested minus any withdrawals adjusted for inflation. The IG
calculated that this approach would reduce by $138,000 the
amount sought in Mr. Becker's clawback suit.
But the fact that Mr. Becker did not seem to be acting in
pursuit of his own financial interests, I agree with the IG's
recommendation that the Commission should reconsider its
position on this issue by conducting a re-vote in the process
so that it is totally free of any taint or bias, and I commend
you, Chairwoman Schapiro, for announcing, I believe yesterday,
that you would call for such a vote. I think that is important.
When do you expect the Commission to have this vote?
Ms. Schapiro. It would be my hope that we could do it in
the next several days.
Mrs. Maloney. And--
Ms. Schapiro. I am sorry, the changing of the reporting
lines in the next several days. We actually want to do more
than just re-vote. We want to have a re-analysis of the issue.
The issue is not before the bankruptcy court yet. They have
told us that they will set a briefing schedule for it at some
time in the future. So we have a little bit of time, but the
staff will have to do a re-analysis and then we will schedule a
vote for the Commission, but I have already instructed that the
re-analysis be started.
Mrs. Maloney. On Tuesday, you stated that, ``you believe
the decision the Commission made on the net equity issue was
appropriate under the law and in the best interests of
investors.'' However, even if the Commission's outcome was
appropriate, we now know the process was flawed, and therefore,
you are calling for this re-vote just to make sure the process
is not tainted, but you agree with the outcome of the vote
previously?
Ms. Schapiro. I certainly agreed at the time that it was
the most equitable way to treat Madoff investors, that the
final account statement method probably was not supported by
the law, that cash-in/cash-out probably was. But there is
generational unfairness because somebody who invested very
early on and is quite elderly and unable to earn back any of
this money that was stolen from him would be at a disadvantage
to a much more recent investor. So that is why constant
dollars, which I think is permitted under the law, was
appealing to me.
All of that said, I obviously want to see the re-analysis
before I would declare that I would be in exactly the same
place because I think it is important to make sure that the
analysis is completely untainted.
Mrs. Maloney. You are taking additional steps to make sure
the process is unbiased?
Ms. Schapiro. Right.
Mrs. Maloney. Inspector General, do you have any additional
recommendations of the Commission to ensure that we can have
confidence in this vote and in this process in addition to what
the chairwoman has outlined?
Mr. Kotz. We would be happy to certainly play a role in
monitoring or looking at that process of vote to ensure--I
think it is actually a good thing that they are going to take
their time to do it, to do a re-analysis. I think that the
recommendations and the discussion, the debate has to be done
without the involvement of somebody with the potential bias or
taint, and so I would be happy to help in any way I can to
ensure that process is completely free of any taint or bias.
Chairman McHenry. [presiding]. The gentlelady's time has
expired. With that, Mr. Guinta is recognized for 5 minutes.
Mr. Guinta. Thank you, Mr. Chairman. I yield my time back
to the Chair.
Chairman McHenry. Thank you. Ms. Schapiro, I asked Mr. Kotz
this question about former Commissioner Nazareth. She had
knowledge of Mr. Becker's Madoff accounts. There was a letter
that would, in standard form, be addressed to the Chair of the
SEC. She specifically addressed it to the General Counsel.
These things were noted in the IG's report. What are your
thoughts on that process?
Ms. Schapiro. Mr. Chairman, I should say that I did not
know that she knew of Mr. Becker's mother's account until I
read the IG's report.
Chairman McHenry. What do you think now of that situation?
Ms. Schapiro. I guess I don't know what to think of it. I
was surprised by it. I believe that they are friends and--but I
don't know.
Chairman McHenry. Was it disappointing? Did it reek of
insider doing?
Ms. Schapiro. No, not to me. We have people come back, and
one of the things the new Ethics Office does extremely well is
counsel people on their post-SEC employment obligations and
requirements to disclose the work that they are doing that
might have them appearing before the Commission. We do have
people who have been at the agency who have left and come back,
and so long as they follow the ethics rules and there is--and
they don't come back within the prohibited time period, it is a
fact of life we live with. I think it is very important, and I
think staff is quite attuned to this, that there be no special
treatment ever for people who are former employees of the
agency.
Chairman McHenry. Sure. But Ms. Nazareth knew of his
account and knew what was she recommending would benefit him.
That certainly has the appearance of impropriety, does it not?
Ms. Schapiro. It is hard--I am sorry, it is just hard for
me to judge that.
Chairman McHenry. Okay. Then let me ask you a different
question. I want to give you plenty of time to answer. You
testified before that knowing what you know now, had you known
then what you know now, and you have referenced that before and
you have been very forthright about it, tell me what you should
have done or what you would like to have done if you were able
to rewind the clock. Walk us through that because--and the
reason why I ask and I ask you about your personal recusal. We
are not here judging your ethics. There was a decision made
that we think was inappropriate, that the record shows raised
real questions, and so you have recused yourself on matters
that weren't even an ethics violation, you just were concerned
and you recused yourself. So rewind and just walk us through
that.
Ms. Schapiro. Sure, I would be happy to. Even understanding
that every employee's ethics obligations are their own--and
this is a senior government attorney with lots of experience--
in hindsight, I wish I had asked questions. I wish I had--when
he had said his mother had an account, she died 6 years ago, it
was closed, I wish I had thought to say, let's play this out,
what are all the possible things that could happen down the
road if we were thinking very aggressively and very creatively
that could impact the fact that this account, which seems so
remote to me when he told me about it, could have any
implications whatsoever for your personal financial interests
or for an appearance issue for the SEC as we deal with these
issues. In hindsight, I wish I had asked more questions.
Chairman McHenry. At the time, you were coming in to clean
up the SEC after dealing with all the kinks of the Madoff
situation, that this was an SEC failure, that they didn't see
it happening; that citizen watchdogs had tried to point this
out to the SEC and the SEC didn't take action. So, when the
former Chairman, Chairman Cox, said those on the SEC staff who
even donated to a charity connected to the Madoff situation had
to recuse themselves, do you think in hindsight you should have
simply said step aside, simply because of the appearance?
Ms. Schapiro. I would say, I wish I had known about
Chairman Cox's memo to the staff. It was obviously before I
arrived. He was still the Chairman, and I didn't know about it.
But I think, as I said back in March when I testified, that in
light of what I know now, yes, I wish he had recused. I wish I
had thought to ask him to do that but I didn't.
Chairman McHenry. Did you ask for the IG report before or
after the hearing back in March?
Ms. Schapiro. I believe it was before the hearing. Yes, I
am confident it was before the hearing.
Chairman McHenry. Okay.
Ms. Schapiro. We can double-check the days but I am
confident.
Chairman McHenry. Okay. Thank you for your testimony. Mr.
Miller for 5 minutes.
Mr. Miller of North Carolina. Thank you, Mr. Chairman. My
questions are not about Mr. Becker's conduct or the decision--
the investigation by the SEC or the decision to refer, but
about the SEC's investigation of conduct generally and
decisions to refer to the Department of Justice.
The speech at the Academy Awards by the producer of
``Inside Job'' can sound superficially like an appeal to mob
rule, ``Why has nobody gone to jail?'' We don't put people in
jail in this country because something went really wrong and we
need somebody to blame. Politicized prosecutions really are
incompatible with democracy and with the rule of law.
On the other hand, the Teapot Dome scandal was in part
about the ability to use--by political insiders to use their
political clout to keep a prosecution from happening, to
protect people from prosecution who clearly were guilty of
criminal conduct. And the Supreme Court at that time said that
it was a proper role of Congress, Congress' oversight powers,
to investigate how the Executive Branch used criminal
prosecution powers.
There is now a lot of civil litigation pending around the
country--I am sure you are aware of it--arising out of mortgage
securitization in the last decade. The allegations in those
lawsuits are pretty similar, and some of it seems to be very
serious and, if true, is hard to imagine that it does not rise
to the level of crimes.
There is now a lawsuit in New York by MBIA and Ambac to
mortgage insurers against--it is against Chase but for conduct
that Bear Stearns, that was later purchased by Chase, and the
allegations are that Bear Stearns bought mortgages from the
originators, put those mortgages in a pool, sold bonds based on
the pools, no longer really had any interest in the mortgage,
any beneficial interest in those mortgages, and at that point
went back to the originators and said those mortgages were not
what you said they were and we could require you to buy those
back from us, but instead we will settle for money. And they
did settle for money. They kept the money and said not a word
to the mortgage investors.
Also, the allegation is that their due diligence firm,
Clayton Holdings, found lots and lots of mortgages that did not
comply with the representations and warranties, and what they
did was take those out of the pool because 1 in 10 came--they
examined 1 in 10 but put them in the next pool, knowing that
exactly the same representations and warranties, knowing that
those mortgages did not comply but figured there is only 1 in
10 chance that that mortgage would actually be examined by the
due diligence firm.
Those appear to be allegations of criminal conduct. Is the
SEC investigating that conduct or the other similar allegations
around the country, and if not, why not?
Ms. Schapiro. Congressman, as you know, we don't have
criminal authority although we work closely--
Mr. Miller of North Carolina. But you can investigate and
refer?
Ms. Schapiro. Yes, and we do work very closely with the
U.S. Attorney's offices around the country and State Attorneys
General. I can tell you that we have a pipeline full of active
cases coming out of the financial crisis that include issues
around the quality of mortgages that have been pooled, the
adequacy of the disclosure, and about whether those mortgages
met the representations and warranties that were given. And we
have brought a number of cases, about 70, coming out of the
financial crisis naming CEOs and CFOs in fact, and we will
continue to see those cases from the SEC. We are moving very
aggressively.
Mr. Miller of North Carolina. Has the Inspector General's
Office looked at any of these decisions?
Mr. Kotz. That wouldn't be within our area. We as the
Inspector General's Office look at decisions involving SEC
employees. I am happy to explain the process we went through in
determining to refer this matter to the Department of Justice.
We essentially gathered the facts in this investigation and
provided that information to the Office of Government Ethics.
The Office of Government Ethics is the leading body that
understands and interprets ethics matters, and obviously there
were different factors to consider in this case. One that was
mentioned earlier is that Mr. Becker sought ethics advice,
another is that we didn't find evidence that Mr. Becker
intentionally sought to financially profit from this. On the
other hand, there were concerns about his personal
participation in a matter that could affect his financial
interest.
So, we gathered up all the evidence. We provided it to the
Acting Director of the Office of Government Ethics. He came
back and recommended that we refer it to the Department of
Justice for a potential criminal review. We felt it was our
obligation that once the Office of Government Ethics indicated
that it should be referred that we do so.
Chairman McHenry. The gentleman's time has expired. I
recognize the chairman of the Oversight Subcommittee of the
Financial Services Committee, Mr. Randy Neugebauer of Texas.
Chairman Neugebauer. Thank you, Mr. Chairman. Chairman
Schapiro, in Mr. Kotz's report, he makes it clear that before
Becker's arrival, the Commission had been twice briefed on the
money-in/money-out proposition and that the specific payout
plan would follow and that--and according to Steve Harbeck, he
went so far as to say that the SEC and SIPC had verbally agreed
to move forward with the money-in/money-out method; yet,
shortly after Mr. Becker arrived, the Commission made a 180-
degree turn.
Can you explain why that happened and Mr. Becker's
influence on that process?
Ms. Schapiro. Sure. I think it is correct to say that very
early on in the process, the Commission was generally
comfortable with money-in/money-out, and that was the
recommendation of the staff in Trading and Markets, but what
coincided, actually, I believe, roughly with Mr. Becker's
arrival at the Commission, is lots of victims coming forward
through letters and emails and in other ways very, very
unhappy, profoundly unhappy, about money-in/money-out because
it limited the amount of their recovery. And really pushing
very hard for the Commission to consider whether a final
account statement was a better way to calculate net equity.
I think it is incumbent upon us as a government to not just
say, forget it, we have already made up our minds and even
though you might be bringing us a new theory, a new legal
theory, a new idea, we are not going to listen to you. And so
the Commission took the time to hear out those victims and
understand their legal arguments. We concluded nonetheless at
the end of the day that money-in/money-out was the right way to
go, that final account statement wasn't appropriate, but I
think we have an obligation to hear people.
Chairman Neugebauer. One of the things that I kind of
wonder about from your other testimony, you said you had to
think about whether Mr. Becker's account had lost or made
money; it didn't really dawn on you. But if you were familiar
with Mr. Madoff's scheme, everybody always made money, and so,
if you got out early, then those people who got out early
showed in many cases substantial gains. In fact, I think Mr.
Becker's family account started off with an initial investment
of $500,000, and I think when they cashed it in, it was for $2
million. And so, from a perspective of looking at a different
settlement matter basically for those people who got out early,
meant that changed the clawback calculation.
I am having a hard time. You are a very smart person and
you have been in this business a long time. When you keep
telling me it didn't dawn on you that there was an issue here,
I am shocked.
Ms. Schapiro. I didn't know when the account was opened. I
didn't know how much was put in. I didn't know how much was
taken out at the time it was liquidated because apparently it
was liquidated as a result of a death. I had none of that
information. Of course, we all know that Ponzi schemes do make
money until they don't anymore, but I had no sense of how long
it had been open, what had been deposited, and what had been
withdrawn. It just was not information that I had.
Chairman Neugebauer. So when Mr. Becker said that his
family had an account with Madoff, early in that process, it
didn't cross your mind to ask, how much money are we talking
about here; are we talking about $250 or $2.5 million? It
didn't dawn on you to ask because--
Ms. Schapiro. I know. I understand your frustration, but it
didn't. To me, it was an account of a deceased relative from 5
or 6 years ago. It just didn't seem to have a live financial
component to it, to me, at that time, as we were dealing with
all these other issues.
Chairman Neugebauer. So when Mr. Becker then later on in
the process when he is--there are some accounts and some
conversations that you had and I think after it was determined
he shouldn't testify because of the conflict, you said, ``I
believe this, that don't worry, you will have other
opportunities.'' You were all kind of making light of the fact
that he didn't get to testify. At that point in time, didn't it
dawn on you then, or when did it dawn on you, I guess is what I
am asking? When the newspaper account came out, did it dawn on
you then or did it dawn on you before then?
Ms. Schapiro. Obviously, when I read that he had been sued
in a clawback suit, it very clearly dawned on me, which is why
I asked the Inspector General to look at it. It did not occur
to me at the time that he would have a personal financial
interest in how this issue was resolved. I had nothing to gain
by this.
Chairman Neugebauer. I know that. I am just trying to--I am
trying to make sense of it, really is what I am trying to do
because quite honestly a lot of this just seems so commonsense
that through this whole process, it raises the question of, if
these kinds of things are falling through the cracks, are there
other kinds of things that are falling through the cracks here
that haven't come to light yet, that we are just quite not
aware of. Do you follow what I am saying?
Ms. Schapiro. I do. I won't tell you there is nothing going
wrong anywhere in the SEC at any given moment, but I will tell
you that we have worked tirelessly to improve the operations of
the agency in almost every aspect of it, and I think we have
tremendous results to show for that.
Chairman Neugebauer. I thank you.
Chairman McHenry. The gentleman from New York, Mr.
Ackerman.
Mr. Ackerman. Thank you, Mr. Chairman. I must confess, I am
not totally amazed. As with almost anything Madoff, nothing is
really what it seems, and it is quite understandable once you
view the entire picture what is and what isn't going on and how
easy it was to miss so much of this. It seems to me, though, in
all fairness that this appears to be, from what everybody has
looked at, a pretty isolated case within the agency with very
limited damage most likely done, if any damage whatsoever.
This is everything being relative, I think we are going to
find from what I have read from what Mr. Becker has said and
from my conversation with him some time ago, that he is a
fairly substantial financial person from a fairly substantial
family, and the amounts of money that he might have even
benefited from is a relatively, if I could use the word,
piddling amount compared to the net worth of what he was
looking at.
I do have some concerns, though, about what it looks like
from an ethical point of view. In the Annette Nazareth case, he
actually turned down the opportunity to agree with her argument
and those of her clients that would have, had he accepted those
arguments, benefited him to the tune of $1.5 million. Instead,
he came down on the side, as did you, that it appeared that the
reasonable way to go was with money-in/money-out, plus the cost
of constant dollars at the time, which would have benefited
him, as I understand the back of the envelope calculation shows
$138,500, which in Mr. Becker's circumstance, having been a
person who took a 90 percent cut in salary to take the job,
assuming he is making $200,000 a year in this position meant he
was making $2 million a year previously, which my calculator
says he makes up in 24.9 days, had he done this for the money,
he would have worked a month longer in his old job instead of
taking this one. A question of judgment, yes.
My question is, as a result of his not recusing himself,
was there any damage done to anybody at all?
Ms. Schapiro. I think the answer to that is the damage done
is unfortunately to Mr. Becker's reputation, and he is a fine
lawyer--
Mr. Ackerman. And your agency.
Ms. Schapiro. --and was a committed public servant; and to
the agency and the time that we are all spending sorting
through this issue.
Mr. Ackerman. The decision made to switch him out as a
witness is troubling to me. As I am sure you will recall, there
was a hearing shortly--I think it was the week of your becoming
Chairman and it was a disaster of a hearing, I think, from the
point of view of the witnesses who were testifying, and there
was a lot of acrimony going on. And by the time I reached my
office that day, there was a message from you expressing that
you were aghast at the way top people in the agency conducted
themselves before our congressional committee and you said you
were going to clean that up. I believe that was on a Wednesday,
and I went home for the weekend and saw in the newspapers on
Sunday that you had fired almost everybody who was at that
table because of the way they conducted themselves before this
Congress, and I have to tell you that I was impressed and
remain impressed with what you do.
So I have a concern about switching out the witnesses
because of the fact, as I believe you stated, he would have
been a distraction in having to reveal that he had a conflict
of interest or that he had a Madoff account. Is that
distraction because--not doing that has caused this whole
distraction. Is that because Congress would have now known and
exercised its oversight earlier?
Ms. Schapiro. No, not at all, Congressman. We didn't think
there was a conflict, and recall that our Legislative Affairs
Office knew that he had, in fact, been cleared by Ethics and
determined not to have a conflict, but I believe there was a
worry that it would take away from the focus--
Mr. Ackerman. But his not having--we might have probed it a
lot more--not having to report to him, we might have probed it
in a different way than the Ethics Counsel advised him that he
didn't have a conflict.
Ms. Schapiro. I guess that is possible. It just--it didn't
occur to me. We actually had a better witness for the subject
matter, someone who was very involved with SIPC on the
liquidation issues. I think there was a concern if you have two
great witnesses or one great witness and one good witness, you
pick the one who does not have personal circumstances that can
be distracting because this was the Commission's witness to
speak to the Commission's legal and policy analysis. And so it
was genuinely, I believe, a concern that it not distract from
the important substance of what the subcommittee was going to
be discussing at that hearing.
Chairman McHenry. Thank you. The gentleman's time has
expired. I recognize myself for 5 minutes.
Mr. Kotz, the criminal conflict statute, does it require a
large or small financial interest for it to be applicable? Will
you explain that to us?
Mr. Kotz. No, it does not. There is no requirement that it
be over a certain sum. Any sum at all, where there is a
potential conflict, is a potential criminal matter.
Chairman McHenry. Even if you are working against your own
financial interests?
Mr. Kotz. That is right. In addition to that fact that I
just mentioned, it is irrelevant for ethics purposes whether
you are working for or against your interests. You are not
supposed to be involved in a matter that affects your financial
interests whether it is pro or con.
Chairman McHenry. So, in this light, it doesn't matter if
the gentleman had a high net worth or a low net worth, if he
made a high salary or a low salary; is that correct?
Mr. Kotz. For the purposes of an ethics analysis, that is
correct.
Chairman McHenry. Okay. And what I would say furthermore is
it goes beyond just one individual's reputation. It goes to the
trust and reputation of the agency and institution they are a
part of.
There is time and the last question here for this panel and
the last 3 minutes for the panel, Ms. Schapiro, I will give you
an opportunity to say whatever you didn't get an opportunity to
say.
Ms. Schapiro. Thank you, Mr. Chairman. I think this is a
tragic series of events. I think we have taken great strides
here to improve the operations of the Ethics Office of the SEC.
We have tremendous new personnel there, very talented, very
sophisticated, very, very committed, very tough and aggressive
in their interpretation of the ethics rules, and I feel
confident that we have in place the processes and the
procedures that will help us prevent something like this from
happening again.
Chairman McHenry. Thank you. Mr. Kotz, do you have any
cleanup you want to make?
Mr. Kotz. No. I appreciate the fact that the Chairman is
implementing our--or plans to implement all our
recommendations. I would say that, as I said in my opening
statement, the process worked with respect to the Inspector
General's Office in this case. The Chairman asked us to do an
investigation. We did an investigation in a timely manner. The
information was brought out there, and there are going to be
changes to the SEC's operations as a result.
Chairman McHenry. Thank you. With that, Mr. Garrett just
arrived so he is entitled to 5 minutes. Mr. Garrett is
recognized for 5 minutes.
Mr. Garrett. Thank you. I appreciate the Chair.
So a lot has been made by some, at least, Mr. Becker
through his conflict of interest on the Madoff-related matter
and participation in SEC policy responses regarding Madoff
victim compensation stood to gain personally from the
compensation proposal put forward by the SEC versus the one put
forward by SIPC and its trustees--the SEC proposal was not
adopted by SIPC trustees proposal, however. One reason it may
not have been adopted, even though as Mr. Kotz' testimony
alludes to, is the SEC has the power to overrule SIPC. It is
because SIPC's CEO knew of Mr. Becker's conflict of interest
and used this leverage to keep the SEC, from what? More
aggressively pursuing its alternative net equity formulation.
Additionally, while much has been made of Mr. Becker's
conflict of interest, no one that I am aware of has focused on
the major conflict of interest that SIPC and its trustee has in
formulating a net equity formula for Madoff victims
compensation.
SIPC obviously on behalf of its member broker-dealers wants
to protect its fund from being drained--understandable--so
would have an interest in a formula that was less protective of
the victims. The trustee has an interest in the formula as
well. He has an interest to have a formula that produces a lot
of litigation. Which does what? It then drives up his, and I
guess his firm's, fees as well.
Now, clawback heavy formula, which the trustee openly
adopted, is indeed very lawyer intensive, and by the trustee's
own calculation, his firm will ultimately bill over $1 billion
for the Madoff liquidation.
So my question then is in your investigation, Mr. Kotz, did
you go down this road that I have talked about here in any way
to investigate SIPC and its trustee, some would say, the clear
conflict of interest in this case?
Mr. Kotz. We did not. Our jurisdictional purview is that of
SEC employees. We did not look at the issue of a potential
conflict of interest on the part of SIPC in this case.
Mr. Garrett. Okay. So you are saying it is outside of your
purview or outside of your authority?
Mr. Kotz. Right. My job as Inspector General is to conduct
investigations and audits of SEC employees and contractors. We
would not normally conduct an investigation of someone who
doesn't work for the SEC.
Mr. Garrett. All right. So how about then investigating Mr.
Harbeck's use or knowledge of Mr. Becker's financial interest?
Mr. Kotz. Yes. We weren't aware that Mr. Harbeck was aware
of Mr. Becker's financial interests. While we did interview Mr.
Harbeck in this investigation, he indicated to us that he was
not aware of Mr. Becker's personal interest until it was
reported in the press.
Mr. Garrett. Okay. So you were not aware of it from
information provided to you or is there a back of the envelope
approach I guess to see if there was interest in--
Mr. Kotz. Yes. I have not heard before this allegation that
Mr. Harbeck was aware of Mr. Becker's interest and there was a
conflict of interest as a result. This is the first I am
hearing of it, and because I wasn't aware of that allegation,
we didn't have any evidence, although we didn't look for that
in this case, it wasn't part of our investigation.
Mr. Garrett. I understand. I guess I know the answer, but
did you investigate the trustee's interest then and the
potential for compensation as being a factor or a potential
driving factor in the equity formula that he was advocating?
Mr. Kotz. We didn't look at the entire process of how
either the trustee or SIPC arrived at their particular
approach. We looked specifically at the conduct of Mr. Becker,
who was an SEC employee.
Mr. Garrett. I see. So clearly then, SIPC did not intend
the financial conditions of SIPC to drive the handling of the
victim claim not before or after the failure of the regulator
broker-dealer as a result of the fraud then?
Mr. Kotz. Again, I don't know--I can't say with certainty
what SIPC's motivations were either way because that wasn't an
issue that we looked at in our investigation.
Mr. Garrett. I appreciate that. I will say this then. The
GAO study that I requested will then hopefully shed some more
light on some of these issues, not only for me, but then the
SEC will also benefit from that information and should then,
therefore, I would think, defer its reconsideration vote on the
net equity until the report is complete. Do I see you shaking
your head?
Ms. Schapiro. No, I just--I hadn't thought about that and I
wasn't sure when the GAO report was due.
Mr. Garrett. Okay. So even though not knowing, what do you
think you want to do then?
Ms. Schapiro. I guess I would like to think about that.
Mr. Garrett. Okay.
Chairman McHenry. The gentleman's time has expired. I thank
the chairman of the Capital Markets Subcommittee. I want to
thank the panel for your testimony. Thank you for your service
to our government, to our people. Thank you for your time
today.
This panel is dismissed. We will recess for votes, and when
we return, we will take testimony from Mr. Becker and have a
series of questions.
[Recess.]
Chairman Neugebauer. The hearing will resume. Our second
panel consists of Mr. David Becker, the former General Counsel
of the U.S. Securities and Exchange Commission. Mr. Becker,
welcome. Just to let you know, your written statement will be
made a part of the record, and you are recognized for 5 minutes
to summarize your testimony.
STATEMENT OF DAVID M. BECKER, FORMER GENERAL COUNSEL, U.S.
SECURITIES AND EXCHANGE COMMISSION
Mr. Becker. Thank you very much, Mr. Chairman. Chairman
Neugebauer, Ranking Member Capuano, Chairman McHenry, I
appreciate the opportunity to testify before you, and I thank
you for listening to me. I welcome all your questions.
I am eager for this because for the past 6 months, there
have been many incomplete, misleading, or just plain false
things written about me, and I am eager to answer any and all
questions to put this matter to rest once and for all.
At all times during my service at the Securities and
Exchange Commission, my abiding goal was to advise the
Commission as to the course that provided the greatest benefit
to investors and that was consistent with the law. I am
confident that any fair review of my actions will demonstrate
that this was the only motivating principle behind them. Such a
fair review has not yet been forthcoming.
In sum, I was informed by the SEC's Ethics Office that I
had no conflict of interest in the Madoff liquidation and that
there was no appearance of such a conflict. I did precisely
what I was supposed to do. I identified a matter that required
legal advice from the SEC's Ethics Office, as was my usual
practice. I almost never started a new matter without getting
clearance from the Ethics Office. I sought that advice because
I firmly believe that no one should be the sole judge of the
ethics of his own actions.
I have followed the advice of the Ethics Office completely.
The Office of Inspector General report contains no findings to
the contrary. Indeed, the report confirms that I disclosed the
existence of my deceased mother's Madoff account to at least
seven people at the SEC, including my boss, Chairman Shapiro. I
took no steps to conceal the existence of that inheritance.
The apparent recommendation of the Office of Government
Ethics that this matter be referred to the Department of
Justice is, upon review of the Office of Government Ethics,
less than it seems. The recommendation stems from the fact that
OGE is precluded by law from making any determination that the
criminal conflicts of interest laws may or may not have been
violated. And here I am quoting from their letter, a sentence
that appears in a footnote in the next to last page of a 118-
page report. And in fact, the Office of Government Ethics
expressed no opinion on that issue.
I came back to the SEC because I care deeply about the
agency and its people, because my friend Mary Shapiro asked me
to, and because I thought it was my duty. I knew the SEC was in
crisis and in need of revitalization and reform. I was
flattered that Chairman Shapiro thought I could help. And I
thought so, too.
While I had enormous affection for the SEC, my years of SEC
service and of representing clients before the agency had given
me a clear-eyed view of its shortcomings and of the measures
that might be taken to revitalize it. I still care deeply about
the SEC, and I have seen firsthand how the process I have been
through over the last 6 months harms the agency and the public
interest.
This has been a dreadful experience for me in ways that
there is no need for me to detail here. I am extremely
depressed and very sad that this has been a dreadful experience
for my friend Mary Shapiro and the SEC as well. I feel that
this process has been very damaging to the public interests in
ways that just cannot be apparent to the subcommittees. And so
I thought I would comment a little bit about that. I am going
to comment about that simply by repeating what I said to
Commission members and the staff about this very point when I
took my leave of the SEC last February. And I quote from my
remarks here.
``From the day I walked in the door 2 years ago, until
today, I have been asked how this time around is different than
the previous time. The answer is that it is a hell of a lot
harder. In some ways, we have made it harder on ourselves. In
others, we live with constraints not of our own making. And in
other ways we just live in times that are much meaner than they
were 10 years ago. It is riskier to work here than it used to
be. As you may know, I am having some experience with this
myself. Unfortunately, too many people have experienced those
risks firsthand.
``This time around, I have had more than a few people in my
office weeping with fear about what might happen to them
because one person or another was looking into their behavior.
I have been shocked by that. That shouldn't be. It is a symptom
of the times and a political culture that is quite frankly
seriously `nuts.' To some extent, this enrages me. But mostly
it makes me very sad. I am sad for the agency and for my
friends, and I feel terrible that I haven't been able to help
people more. And it is the source of my biggest worry for the
Commission as I leave.
``When I left here in 2002, I worried a bit that the agency
might be too complacent. I have the opposite worry today. I
worry that all the risks that people run will make the
institution gun shy. It is only natural, but I hope I am wrong.
I hope people here have the capacity to listen to the agency's
critics, be intensely self-critical, keep an open mind to a
better way to do things, and in the end never ever back off
from doing what we believe to be right. No one should take
imprudent risks, and we shouldn't sugarcoat what may befall the
best intention of us. But in the final analysis, we can't live
scared.
``In the end, what has made this agency great is people who
say `the hell with it,' I am going to do what is right, knowing
that we are imperfect beings who often can't know what is
right, and knowing that the risks are real that we will be
called to account for our failures, or for our successes, or
just for being here. It is so important that people here bring
cases, drop cases, adopt rules, walk away from rules, solely on
the basis of what is best for the people we serve.
The people in this room believe that, I know. That is why I
love you all and why the privilege of having been with you for
a time leaves me deeply in your debt.''
I spoke from the heart when I said those words. I will
speak from the heart today.
I welcome your questions.
[The prepared statement of Mr. Becker can be found on page
58 of the appendix.]
Chairman Neugebauer. Thank you, Mr. Becker. You made a
couple of points--and I wanted to go back to that--that you
came to the SEC for the second time at the request of the
Chairman, with good intentions. Would you say that was correct?
Mr. Becker. I would say they were good intentions, yes.
Chairman Neugebauer. But I think one of the things we have
to differentiate here is good intentions and good judgment
don't always coincide. Would you agree with that?
Mr. Becker. As a general proposition, sure, I would agree
with that.
Chairman Neugebauer. So the point of this hearing today is
about people using good judgment. Because as you know--and you
have been around the SEC for a number of years. You represented
people before that. You know the very high standard that the
SEC requires of the people that they oversee. Is that a fair
statement?
Mr. Becker. Yes, it certainly is.
Chairman Neugebauer. I think the point that a lot of us are
concerned about is someone with your intelligence and your
background, your reputation, coming into the agency at a time
when they were obviously under a lot of scrutiny, very high-
profile case, they missed it. They screwed up. So you come in,
Mary has brought you in, and you obviously have some financial
interest or consequence or benefit from the outcome of some of
the distributions to the victims of this. Because I believe if
these numbers are correct, I believe your testimony is that I
guess it is your dad or your mom put about $500,000 in the
Madoff and cashed it out at about $2 million. Are those close
numbers?
Mr. Becker. Those are numbers that I first heard of in late
February of this year. When I arrived at the SEC, all I knew
was that some time before my father died--my father died in
2000--he had opened an account in my mother's name. I didn't
learn directly that my father had opened it, but my mother was
a social worker and an academic, and she didn't do any
investing. I didn't know what he had put in. I didn't know when
he put it in.
Chairman Neugebauer. But the question is: Are those fairly
accurate numbers?
Mr. Becker. No, actually, I don't think so. I think--
Chairman Neugebauer. Are they more, are they less?
Mr. Becker. I will be delighted to tell you. I believe the
records show that my--the account was opened for $500,000, and
that when my brother, acting in a representative capacity for
my mother's estate, liquidated it, there was about $2 million
in the account. The amount that came to me was much, much less
than that because what I got from my mother's will came after
estate taxes were paid. The money went to everybody else
designated in the will. So I got my share. And I don't remember
what the number was.
Chairman Neugebauer. Let me just go--
Mr. Becker. Much, much less than that.
Chairman Neugebauer. So are you familiar with the concept
of net equity?
Mr. Becker. Yes, I am.
Chairman Neugebauer. What is that?
Mr. Becker. Net equity is a statutory term in the
Securities Investors Protection Act that determines how a
customer's claim--that is, how much is paid out to the
customer. Customers who have open accounts at the bankruptcy,
how much they get.
Chairman Neugebauer. So basically, if I understand net
equity, your basis is what you paid in less what you were paid
out?
Mr. Becker. I think that was the issue.
Chairman Neugebauer. And the SEC before you came had
already kind of had an informal agreement with SIPA that the
number that they would use, the net equity position. But
shortly after they got there, you were arguing that they should
consider the constant dollar approach. So my question is, if
you use those two methods and you assume that the trustee is
successful in his lawsuit against you and your estate or
however they are bringing that, would those two methods have a
different impact on you?
Mr. Becker. There is so much sort of thrown into a basket
in your question. Let me see if I can take--
Chairman Neugebauer. I don't have a lot of time. It is
either a yes or no. Yes, there would be different calculations.
Mr. Becker. I can't give you a yes or a no because there
are all sorts of premises in your question about what the SEC
agreed to that just aren't factually accurate.
Chairman Neugebauer. Let's not talk about what is agreed
to. Let's talk about using those two methods. Would there be a
difference in the amount of settlement that you would have with
the trustee?
Mr. Becker. I had no idea that was the case.
Chairman Neugebauer. I didn't ask you--
Mr. Becker. The principal method that we were--
Chairman Neugebauer. Excuse me. I didn't ask you if you had
any idea. What I am asking is, would it have had an impact?
Mr. Becker. I have been told that circuitously by SIPC. I
do not know that to be true. I think it is probably true to a
relatively small amount.
Chairman Neugebauer. What is relatively small to you?
Mr. Becker. I would say $10,000, $15,000.
Chairman Neugebauer. The clawback under the cash net equity
would be, based on what you just told me a while ago, about a
million and a half dollars.
Mr. Becker. No, I don't think I told you that. I think I
told you that that is what the trustee has claimed. I think
that the numbers that the trustee is using are just wrong. But
I knew none of this at the time.
Chairman Neugebauer. Should you have known that?
Mr. Becker. No, I don't think so. I did not even know at
the time that this was knowable.
Chairman Neugebauer. And so your defense of all of this is
that you went to the Ethics Officer and said, ``I might have a
conflict,'' and he said, ``You're fine.''
Mr. Becker. I told him everything I knew. And I said,
``Tell me what to do.'' And he said, ``You should participate
in this.''
Chairman Neugebauer. So if I am an entity or broker or
dealer or something that the SEC is investigating and I make a
trade that you find fault with, my defense is that I asked my
supervisor if I could make that trade and they said it was all
right, and so I am vindicated?
Mr. Becker. In most individual cases, I would say that is
right. Certainly, when it is advice of counsel, absolutely. I
have had many cases like that.
Chairman Neugebauer. But if I have broken the law because
somebody in my organization thought it was all right, that
doesn't change my guilt, does it?
Mr. Becker. But the notion of knowledge is, in the case of
this particular law, included in the law. It is what an
employee does to his knowledge. An employee has to know that
there is a direct and predictable effect on his financial
interest by virtue of the action that he is asked to
participate in. And interestingly enough, I did not hear the
words ``direct and predictable'' at all in the first panel.
Chairman Neugebauer. I think my time has more than expired.
Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman. Mr. Becker, first of
all, thank you for being here, though I have to be honest, I am
a little surprised that you would come to testify in an open
hearing like this when you have another matter pending. But it
is your prerogative.
Mr. Becker, I want to be clear. From my perspective, I
don't really concern myself too much with your specific
details, if you want the truth. My concern here, as I said
earlier, is whether the overall process within the SEC is
working as myself and other Members of Congress think it should
be working. The outcome of a given case raises questions about
whether the process worked.
I am not here as one member to judge you. I am not
qualified to do it. I don't know enough information to do it.
And there are other entities that will do it. So be it. I will
tell you that from the limited review I did read within the
IG's report, there was no indication that I read there, no
hint, no indication, of anything of any criminal wrongdoing. So
my expectation is that maybe it was kicked up simply to pass
the buck along. But we will see.
For me, I would have to tell you that regardless of your
specific actions or the actions of the ethics lawyer at the
time, knowing what I now know, it strikes me that the process
of ethical review within the SEC at the time was the
shortcoming. And that has been my focus. That is why I asked
the first panel: What did you learn, what are you doing about
it going forward? Not so much your specific case. But it
strikes me that anybody with an investment in somebody they are
investigating, no matter how it is, no matter how much it is,
somebody should have said, wait a minute, maybe you shouldn't
be doing this.
I have recused myself. I know you have recused yourself in
other matters. I have recused myself on matters in my
professional life because it was maybe somebody would see it
differently. I would be honest, I wouldn't expect you as an
individual to make that judgment. That is what the Ethics
Office is for. And that is why that office should be very clear
and very precise about its actions. And that is why, to me, I
think some of the proposals that have been made by the IG have
been pretty good.
From that perspective, sitting where you are today, having
been through these difficult situations--I know you read the
IG's report.
Mr. Becker. I have read it once.
Mr. Capuano. The proposals that were made relative to
fixing the process, moving forward, would you agree that they
are good proposals or bad?
Mr. Becker. I haven't thought hard about them. They look
fine to me. I would not--if it were my call, I would say having
Ethics report to the Chairman is not a good idea. If you are
worried about the impact of having a superior, someone giving
advice to a superior, I would worry more if the superior is the
head of the agency than I would if the superior wasn't the head
of the agency.
I have to say lawyers, the Attorney General gives legal
advice to the President of the United States. Every General
Counsel, just about, of large companies reports to the CEO.
Every lawyer in private practice gives legal advice to people
who can hire and fire them, retain them or not. I don't see
this as this big red flag.
Mr. Capuano. I appreciate your opinion, but I would
respectfully disagree, based on--and there is no perfect
process because there is no way you can have somebody who
doesn't answer to somebody somewhere along the line. The
question is, as far as I am concerned, getting them to answer
to as few people as possible. It has nothing to do with you or
anybody else. I think the IG should report directly to the head
of whatever agency they are in, anyway. It has nothing to do
with you or the SEC. Even then, I know it is not a perfect
system. We have an ethics system here in Congress that is not
perfect. But you do the best you can. That is a matter of
opinion.
Again, I want to thank you for coming. I want to wish you
good luck because I know it is a difficult situation. From what
I saw, your record is pretty good. I am hoping there were no
lines crossed. But that will be decided by other people. I want
to tell you that I respect you for coming here today and
talking about what I know is a difficult matter for you.
Mr. Becker. Thank you very much.
Chairman Neugebauer. I thank the gentleman.
Chairman McHenry.
Chairman McHenry. Thank you. I thank you for being here
today. You certainly had a distinguished time in government
over a period of years, and you certainly have had a long and
distinguished career in private practice as well. Today,
though, this is a subject matter that is very sensitive. With
hindsight, I think people are looking at this stuff
differently.
But back in March, in my subcommittee, Representative Mack
asked Chairman Shapiro, ``Do you believe that Mr. Becker was
sufficiently aware of the need to avoid actual or apparent
conflicts of interest?'' Chairman Shapiro responded, ``Do I
wish now that he had been more sensitive to the potential of
this issue to raise an appearance of conflict? Yes. I wish that
had happened.''
Do you agree with this judgment?
Mr. Becker. I certainly agree that she wishes it hadn't
happened, and I personally found that statement extremely
distressing to me. I don't like to think that I let her or the
agency down in any way or that anybody feels that way.
Having said that, when you go to a doctor, you put yourself
in the doctor's hands. When you go to--when you seek legal
advice, you seek--you put yourselves, in this case the Ethics
Counsel's hands. I followed that advice.
If the question is, notwithstanding that advice should I
have said well, it is just too risky for me or for the agency,
I will say I didn't predict in any way what happened. I didn't
think the trustee was going to sue me. I didn't think the
sports section of the Daily News in New York was going to make
a big deal out of this. I didn't think, frankly, that this
committee would respond in the way it did. I didn't anticipate
any of that.
Would it have been better if I did? You bet.
Chairman McHenry. In February of 2009, were you aware that
Madoff trustees were considering clawbacks?
Mr. Becker. I don't think so. I think what I was aware of
was that there had been clawbacks recently instituted in very
large amounts for people whom the trustee alleged had been
complicit in the fraud.
Chairman McHenry. So you are not aware of clawbacks of
Madoff beneficiaries, outside of large beneficiaries?
Mr. Becker. Large beneficiaries who the trustee said had
been involved in the fraud. That is correct.
Chairman McHenry. So in that March hearing that I mentioned
before, Chairman Shapiro was asked whether she regretted your
situation. Her response was, ``I wish Mr. Becker had recused
himself, absolutely.''
Do you agree with that judgment?
Mr. Becker. Again, I take that as a sincere statement of
her views.
Chairman McHenry. I am not asking your judgment on her
sincerity. Do you agree with that judgment that you should have
recused yourself?
Mr. Becker. Forgive me. I know I talk in a little bit of a
roundabout way, but I am getting there. I think--still think--
that I did what I was supposed to do. I will just have to live
with the fact, unhappily, that Chairman Shapiro has a different
view.
Chairman McHenry. Is it your view that you should have
recused yourself at that time, knowing what you know now?
Mr. Becker. I don't know what you mean by knowing what I
know now. Do you mean knowing the trustee would sue me? If I
had known the trustee was going to sue me, of course I would
have recused myself.
Chairman McHenry. You said you did not know that certain
items were knowable about the inheritance you received; the
nature of the Madoff account.
Mr. Becker. Yes.
Chairman McHenry. Do you know more about the nature of that
inheritance today than you did in February of 2009?
Mr. Becker. Sure. I didn't know--
Chairman McHenry. With that knowledge, knowing the details
of that inheritance and that Madoff account, with that
knowledge, would you--with the knowledge that you possess today
just simply about that transaction, would you have recused
yourself?
Mr. Becker. I don't know the answer to that. I truly don't.
I don't know exactly or even close to exactly what the
rationale of the Ethics Office was. I did not, for example, see
the link--just didn't see it--between taking a position on
measuring the amount that folks in the bankruptcy can claim and
clawbacks. I don't know how important that was to the Ethics
Office. I don't know how important the sense of imminence of a
lawsuit was. I don't know that merely the fact of the account
would have changed my view.
Chairman McHenry. Thank you.
Chairman Neugebauer. The gentleman from Maryland, Mr.
Cummings.
Mr. Cummings. Thank you very much, Mr. Chairman. First of
all, I want to thank you for being here today. I know that this
must be difficult, considering the fact that your case has been
referred to Justice. I must tell you that I kind of agree with
Mr. Capuano. This case troubles me from a standpoint as a
lawyer and one who is giving advice many times to many people,
that you went and got the advice of folks and now you find
yourself in this difficulty.
So I want to go to some things that were testified to
earlier and just to clear up some things.
Earlier, Mr. Kotz talked about subordinates. And you had
gone to subordinates. One of the things that they have cleared
up in the new recommendation--I know you have been
concentrating on other things--is to make it so that I guess
you would report directly, these kinds of things, to the top
person.
Did you in any way feel when you were being interviewed and
you talked to these seven other people who cleared you, said
you were okay to do this, that they were under any pressure
whatsoever?
Mr. Becker. No. In fairness to them, I think the point of
my talking to those seven other people is that I didn't make
any effort to conceal this. In fairness to them, not all of
them were people who would have had any responsibility to clear
me or not. I did think it was inappropriate of Mr. Kotz to say
in his report that he saw seven people and none of them said
anything about this. This had nothing to do with most of their
responsibilities.
Mr. Cummings. Let me get through these questions because I
want to make sure we are clear.
Mr. Becker. Yes, sir.
Mr. Cummings. You have people who are probably going to
look at this film 50 million times.
Mr. Becker. I may reconsider, then.
Mr. Cummings. Okay. Mr. Becker, who exactly had a duty to
identify that there was a potential conflict of interest and
disclose that information appropriately throughout the
Commission to Commissioners and the relevant staff? Who would
have that duty? Can you answer me very briefly?
Mr. Becker. I don't think anybody has a duty to report
things that aren't conflicts of interest. You either have a
conflict of interest or you don't.
Mr. Cummings. You didn't believe that you had a conflict?
Mr. Becker. That is correct.
Mr. Cummings. As the IG found in his report, you seem to
not believe there was a strong possibility that the Madoff
trustee would bring a clawback action against you.
Specifically, as you explain in a May 2009 email to the SEC
Ethics Counsel, Mr. Lenox, ``your instinct is that any claim
would be much too small and of dubious merit to bring in any
event.''
Could the fact that you viewed the possibility of a
clawback suit to be remote have led you to misjudge whether or
not you had a conflict of interest?
Mr. Becker. I was very careful not to make that judgment.
That judgment was made by the Ethics Office. I just told them
what I knew.
Mr. Cummings. A little earlier there was a question by Mr.
Issa, and he asked a question about--I guess it would be
referring to you--if you presented bad information to the
people you talked to--it talked about what the result would be.
In your mind, did you present any misleading information or
something that was not true?
Mr. Becker. No.
Mr. Cummings. Could the fact that others also viewed the
possibility of a clawback suit to be remote have led them to
misjudge whether or not you had a conflict of interest?
Mr. Becker. I just can't say what was in their head.
Mr. Cummings. If you thought that you would be subject to a
clawback lawsuit, what would you have done differently, if
anything?
Mr. Becker. It's hard to say, but I probably would not have
participated in the matter.
Mr. Cummings. If others at the SEC thought you would be
subject to a clawback lawsuit, do you believe they would have
done things differently?
Mr. Becker. I guess you mean the Ethics Office. They
probably would have, yes.
Mr. Cummings. Why did you come here today to testify? I
know we asked you to come. What is your objective?
Mr. Becker. My objective is to get the truth out. As simple
as that. I have nothing to hide.
Mr. Cummings. And you believe that you did nothing wrong,
is that right?
Mr. Becker. That is correct.
Mr. Cummings. You informed William Lenox, head of the SEC's
Ethics Office, of your mother's Madoff account--shortly
before--or after I arrived at the SEC--``and I never asked
Chairman Shapiro or Mr. Lenox not to share the information
about my mother's account.''
What was that all about?
Mr. Becker. I didn't treat this as some deep, dark secret.
I went to the Ethics Office for advice. I didn't say, ``Don't
tell anybody.'' I didn't tell lots of people just because I
frankly didn't think about it. But I didn't take any steps to
protect this information or conceal it or anything like that.
Mr. Cummings. Mr. Chairman, I see my time has run out.
Chairman Neugebauer. I thank the gentleman.
Mr. Becker, in a letter you wrote me and my colleagues you
stated that you recognized that it was conceivable that this
issue could affect your financial interest because the issue
could affect the trustee's decision to bring clawback actions
against persons like you.
Mr. Becker. Correct.
Chairman Neugebauer. Mr. Becker, you concede it might
affect your financial interest. If you had recognized that,
wouldn't that have triggered that maybe this will have an
appearance of a conflict? Let's just get past the legal part.
It goes back to what I was saying a while ago. Sometimes good
intentions and good judgment--as a lawyer who has been
practicing for a number of years, particularly in an agency
like the SEC, where you are very sensitive to either actual
conflicts of interest or appearance of conflict of interest,
that didn't resonate with you?
Mr. Becker. Appearance is used in two senses. There is a
rule that talks about appearance. I don't think it is a close
question; that I was well within the four corners of the rule.
There is appearance in the sense we have heard talked about
earlier today as the Washington Post test, the New York Times
test. That is very subjective. You can't even get people to
agree which newspaper is the relevant one.
Sure, I thought of that. But in all candor, I did not
anticipate either that the trustee was going to sue me or the
reaction would be what it has been.
Chairman Neugebauer. But you--if I misunderstood your
letter--you did anticipate that was a possibility, did you not?
Mr. Becker. ``Conceivable,'' I think was the word I used,
which means there are a whole bunch of things conceivable. The
level of probability is what governs.
Chairman Neugebauer. But when you conceive of it, you are
thinking about it, right? So you are aware of it. In other
words, you had knowledge that you potentially could be subject
to a clawback lawsuit in this matter.
Mr. Becker. Yes, conceivably, possibly, maybe. But I did
not think that was going to happen.
Chairman Neugebauer. And so, I want to go back to there was
someone--Congress asked you to come and testify. You all had a
little team meeting and it was decided that you would have to
disclose these interests in the Madoff issue. It was determined
that you should not testify, is that correct?
Mr. Becker. No, not quite. That is not quite how it worked.
What happened was I was going to testify. I came to the head of
the Office of Legislative Affairs, just like I went to Ethics,
and said, ``Listen, this is a political calculus. This is not
the world I know. I want to know what you think about it.'' He
first said, ``Oh, I think it is fine.'' Later in the day, he
called me up and said, ``Well, I am a little worried that it is
going to be a distraction.'' I said, ``If it is going to be a
distraction, you can be--
Chairman Neugebauer. What is going to be a distraction?
Mr. Becker. The fact that my mother had an account.
Chairman Neugebauer. So you disclosed that to the
Legislative Affairs folks?
Mr. Becker. Sure. I also told them that I would mention it
upfront to take any question that I wasn't disclosing it off
the table. And I said, ``You guys make the political
judgment.'' Later in the day he called me and said, ``I don't
think it is such a good idea. Let me check with the Chairman.''
He checked with the Chairman and that evening said to me, ``I
spoke to her and I think we would be better off with somebody
else.'' I saw her the next morning and she confirmed that. That
is basically all that happened.
Chairman Neugebauer. You all had a conversation and some
kind of laughing and joking that oh, you will get another
opportunity.
Mr. Becker. Yes. I don't think this is what she had in
mind. But, yes.
Chairman Neugebauer. Here is the other question, then. If
you felt like it was appropriate to disclose to the Leg Affairs
people before you went to Congress, I am still trying to
reconcile why you didn't think when you are making a very
important presentation to the Commission between encouraging
them to use constant dollar, that you didn't think it was
appropriate to say to those folks, and by the way, this could
impact me. If I was a Commissioner or if you were a
Commissioner, wouldn't you? Because subsequently to this all
those Commission members were not happy that you did not
disclose that.
Mr. Becker. I don't know the questions that were asked of
them. The quotation from Commissioner Aguilar said he was upset
that this conflict wasn't disclosed to him. I didn't think I
had a conflict. I was told I didn't have a conflict. And you
don't generally make a habit of going to people and saying, ``I
don't have a conflict, but I think you ought to know about
it.'' You say that to them and they think: What message is he
trying to send me?
When it came to Congress, which is not the world that I am
familiar with, I needed to take someone's advice.
Chairman Neugebauer. But you are familiar with the world at
the SEC?
Mr. Becker. I am indeed.
Chairman Neugebauer. Going back to the high standards of
ethical behavior that you hold, the people the SEC regulates,
and the fact that you stated in that letter that it was
conceivable that you had an issue there and that you had felt
later on to disclose that. I agree with my good friend Mr.
Capuano that it is a process here, but there is some personal
responsibility that goes with these positions. And that you
didn't think that there was some potential conflict there, I am
still having a hard time reconciling that.
Mr. Becker. I take complete responsibility for my actions
here. Frankly, it is easy for me because I think I behaved
appropriately. It is passing strange, I think, to say to
people, I have something to tell you that I have been told
doesn't affect my judgment, that I don't believe affects my
judgment, that doesn't color the advice that I have given them.
I don't think it would have been inappropriate to tell them. It
is not a bad thing to tell them. But I didn't think of it. And
I think the reason I didn't think of it is it really was not
germane to what they were doing.
Chairman Neugebauer. I see my time is up. The gentleman
from New York.
Mr. Ackerman. Thank you, Mr. Chairman. Mr. Becker, count me
among those who are surprised you are here today and also
impressed with the fact that you are here today. You have been
very thoughtful with us. You were very forthright with me when
I spoke to you when the story first broke in the New York Daily
News, despite the fact that it was your scheduled last day to
be on the job. And I appreciated that.
Mr. Becker. I was glad to do it.
Mr. Ackerman. Am I correct in restating that it was your
father who opened the account for your mother?
Mr. Becker. I believe so. I don't know who else it could
have been. I am quite certain that it wouldn't have been my
mother.
Mr. Ackerman. It had to be somebody other than your mother,
and that logically would have been your father?
Mr. Becker. Yes, it would have.
Mr. Ackerman. Nobody else was going to give her half a
million dollars in an account?
Mr. Becker. My father traveled from time to time. Nothing
that I knew about.
Mr. Ackerman. He also opened accounts for charities that he
gave money to?
Mr. Becker. I don't know whether he opened accounts for
charities. I know he gave money to charities.
Mr. Ackerman. He had a particularly favorite charity in
Westchester, a Jewish seminary; a rabbinical school?
Mr. Becker. Outside of Philadelphia.
Mr. Ackerman. I am sorry, outside of Philadelphia.
Mr. Becker. It was a rabbinical school to which I believe
he gave a great deal of money.
Mr. Ackerman. He gave a great deal of money to them. They
did have a Madoff account that they sold the year after he
died, I understand.
Mr. Becker. As I mentioned to you on the telephone in
February, that is the first I had heard of it. It may be that
someone that he knew there was recommended--
Mr. Ackerman. But he endowed that seminary.
Mr. Becker. He contributed money to them. They were endowed
from many sources.
Mr. Ackerman. Did your father know Madoff?
Mr. Becker. No. I shouldn't say that. I would be amazed if
he did.
Mr. Ackerman. You do not know how he or your mother wound
up with a Madoff account? The Madoff game was, he played hard
to get. You had to know somebody who knew somebody.
Mr. Becker. I don't know. When you are 85 years old and you
have a lot of money to invest--$500,000--I suspect it was much
easier than it appeared.
Mr. Ackerman. Would you have thought your father had a
reason to know that it was a Ponzi scheme?
Mr. Becker. My father? No. My father was the most ethical
man I have ever met. And I am 64 years old, so there still may
be others. But, no.
Mr. Ackerman. Your mother would not have suspected that she
had an investment in a Ponzi scheme?
Mr. Becker. No.
Mr. Ackerman. When did you suspect that Madoff was a Ponzi
scheme?
Mr. Becker. I never suspected until I read it in the
newspapers or however--when it broke.
Mr. Ackerman. You knew who Madoff was?
Mr. Becker. I had heard the name when I was at the SEC the
first time, that--
Mr. Ackerman. There were indeed reports to the SEC that it
was a Ponzi scheme by Mr. Markopolos and others?
Mr. Becker. Not that I saw, not that I heard of. We now
know there were. But I had no idea of that.
Mr. Ackerman. So you had no way of knowing or should have
known that it was a Ponzi scheme.
Mr. Becker. That is correct.
Mr. Ackerman. Could anybody have known that it was a Ponzi
scheme?
Mr. Becker. Could anybody? I think once the thought enters
your mind that it is a Ponzi scheme, it is not that hard to
figure out.
Mr. Ackerman. When it was brought to your attention by
Annette Nazareth that there was an alternative view to last
statement, she brought the case to your attention, is that not
accurate?
Mr. Becker. I don't want to insult Ms. Nazareth--and she
may be sorry to hear this--but I don't remember that she
brought anything to my attention on this. I remember other
lawyers who were involved.
Mr. Ackerman. I think the report had stated that she wrote
a letter on behalf of her clients.
Mr. Becker. That is interesting. That is, I have to say, a
characteristic of this report. She was one of, I don't know,
10, 12 signatories to that letter. She didn't write the letter.
Mr. Ackerman. But there were others who had that view?
Mr. Becker. Yes.
Mr. Ackerman. Indeed, there is a subcommittee Chair on our
committee who has a bill that says that we should be using that
methodology.
Mr. Becker. Yes. I am aware of that.
Mr. Ackerman. If you had gone along with that suggestion,
which is a bill before this Congress, and proposed by people
and written to the Commission, among others, if you had adopted
that view, you would have been a greater beneficiary?
Mr. Becker. That is what I have been told. I guess that is
correct. But, frankly, the thought never crossed my mind.
Mr. Ackerman. Why did you decide that the view should be
the cost of money?
Mr. Becker. We struggled through that literally for months.
We were very worried about the impact of this.
Mr. Ackerman. You knew at that time you were the
beneficiary of an account?
Mr. Becker. I knew I was the beneficiary--I knew that I got
money from my mother's estate. I didn't get an account.
Mr. Ackerman. Your brother handled it, from what you said,
and your brother never said there was a $2 million account?
Mr. Becker. I learned that in February of 2009.
Mr. Ackerman. At the same time you came back to the SEC,
the same month?
Mr. Becker. Slightly before, yes. I had already agreed to
come to the SEC.
Mr. Ackerman. Your brother liquidated a $2 million asset
within an account to which you were a beneficiary without you
knowing there was even that account. Is that what you are
telling us?
Mr. Becker. That is exactly what I am telling you.
Mr. Ackerman. There was a lot more money in that account,
that $2 million was not a significant thing to tell you?
Mr. Becker. I don't know why my brother didn't tell me. I
think the money, when he did tell me about it, was basically he
called me up and said, isn't this interesting, in effect. This
guy Madoff, we sold out of his account to pay estate taxes a
few years ago. That is all he told me. And that is when he told
me.
Mr. Ackerman. And at that point, you felt no compunction to
reveal that again--is that when you revealed it to the ethics
people?
Mr. Becker. Yes, pretty much. Yes. When I arrived at the
SEC, I sat down with them for, I don't know, an hour, 2 hours,
and reviewed anything and everything.
Mr. Ackerman. And you knew what clawback was at that time?
Mr. Becker. Yes, I knew what it was.
Mr. Ackerman. Do you think that the people in the ethics
business knew what clawback was at that time?
Mr. Becker. I don't know the answer to that.
Mr. Ackerman. They are not necessarily the sophisticated
person in finance as are you, though?
Mr. Becker. I really don't know what they knew.
Mr. Ackerman. But even though there was only a slight
possibility of you being subject to clawback, you did not think
that it was appropriate to suggest to them that you might have
that problem?
Mr. Becker. Oh, I am sure that when it became relevant to
anything that I was doing, that I did mention that to them.
Mr. Ackerman. You went back to them and told them that you
might be subject to clawback?
Mr. Becker. Absolutely.
Mr. Ackerman. And they did not suggest at that time a
different answer than they gave you the first time? Because if
there was clawback, you would be subjected to legal action.
Mr. Becker. No. No, they didn't. The short answer is no,
they didn't.
Mr. Ackerman. My time is up, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
Now, Chairman McHenry.
Chairman McHenry. Thank you. The Commissioners all told the
Inspector General in his report that by November 9, 2009, when
you recommended the constant dollar approach to them, that they
understood that this choice would affect the amount that the
trustees could seek in clawbacks. Did you?
Mr. Becker. No, I didn't. I read the Inspector General's
report in reference to all sorts of things, conversations that
apparently took place before I got to the SEC. And no, I did
not know that.
Chairman McHenry. You did not know that the Commissioners
testified knew what effect the amount the trustees could seek
in a clawback. You didn't know this?
Mr. Becker. That is correct. And I have to say--
Chairman McHenry. I wasn't saying like your account. I am
just saying generally speaking that this constant dollar
approach would affect the value of what they could seek in
clawbacks.
Mr. Becker. The only area that we as an office and I as a
human thought about that was clawing back moneys that had been
paid by SIPC. I am not sure at all that in fact the definition
of net equity will control what you can get in clawback cases.
I know very well that if I were representing the trustee, there
are a lot of arguments I could come up with that it wouldn't.
Chairman McHenry. That is being argued right now in court.
Mr. Becker. Yes.
Chairman McHenry. Now, in terms of, you said that the
possibility of a clawback for the account you are an heir to
was remote, right?
Mr. Becker. I thought of it as remote.
Chairman McHenry. In February of 2009, just for context.
Mr. Becker. Correct.
Chairman McHenry. This is what I am trying to understand.
Mr. Becker. Sure.
Chairman McHenry. The SEC Commissioners within the IG's
report say that they are angry that you didn't disclose this to
them. They were your client, in essence. You are General
Counsel. But you disclosed this as a matter of optics, is
really the discussion; as a matter of appearance, to the
Legislative Affairs Office. You mentioned it to the Chairman at
the very beginning. You went to the Ethics Office. They said it
was fine. But then you bring it up later to the Legislative
Affairs Office. Why not just tell the SEC Commissioners?
Mr. Becker. I don't remember considering telling this to
the SEC Commissioners. I will say that this is a different
arena requiring different judgments. Frankly, when you are
testifying in front of Congress, politicians have been known to
be political. You think about things differently than when you
think about simply what do I need to tell my clients. I was out
of my depth when it came to political judgments.
Chairman McHenry. Interesting. I just have to ask you this.
Mr. Becker. Sure.
Chairman McHenry. With the mess that you were coming back
to the SEC to help clean up, which is the ramifications of this
missing Madoff, right? Why not just recuse yourself? Why not
just say, look, I know Ethics says I am fine. I have disclosed
this to the Chairman. You know what, it is such a hot button
issue, and this is the SEC. We want to be above reproach. I am
just going to recuse myself.
Why wouldn't you do that?
Mr. Becker. I think that is a great question, and I am
glad--
Chairman McHenry. Thank you. I thought so, too.
Mr. Becker. Excellent. So we agree on that. There are two
sides of this. If I am looking--I am trying to think of a
delicate way to put this. I worry sometimes that people spend
too much time worrying about covering their rear ends rather
than doing the right thing. I had a job. And I wanted to do my
job. Sure, if my principal concern was I want to take no risk
that I am going to be criticized and the agency is going to be
criticized, that is what I would have done. But the risk that
what would happen happened, that this would get all this press,
that David Kotz would write a dreadful report, and that we have
two hearings on the same subject did not occur to me.
Chairman McHenry. So you just didn't consider recusing
yourself?
Mr. Becker. Oh, I considered it. That is why I sought
guidance from Ethics. I was told, in effect, there was no need
for me to recuse myself.
Chairman McHenry. Have you recused yourself previously?
Mr. Becker. I would say when I was at the SEC, I recused
myself 50, 100 times from things.
Chairman McHenry. Was it because Ethics Counsel said you
must every time?
Mr. Becker. I would never say never to any question, but I
would say certainly the vast majority of the times.
Chairman McHenry. Were there some where you just said, out
of appearance sake, I shouldn't. So I should recuse myself.
Mr. Becker. I can't remember a time when I didn't follow
the advice of Ethics. And frankly, Inspector General Kotz
mentioned that I got treated differently from other people, and
he couldn't be more wrong. But yes, I always followed Ethics'
advice. I guess as a lawyer, I expect my clients to follow my
advice. And as a non-hypocrite, I behave the same way.
Chairman McHenry. And because you are a member of the Bar,
you should have a higher ethical standard as well?
Mr. Becker. I will match my ethical standards against
anybody in this room in a heartbeat.
Chairman McHenry. Do you see how people have a problem with
the appearance that you are an heir to a Madoff account, that a
decision that you recommended to the SEC, a governmental
regulator, then affected your financial well-being, even if it
is small? Do you think that is a problem?
Mr. Becker. The problem with this is the standard that you
are using as sort of an appearance standard is it is almost
like a perpetual motion machine. You say, I think it is a
problem, so it must not look good. And in truth, over my
career, I have been pretty careful about ethical matters. I do
see what has happened. I am not pleased about what has
happened. I think that there is a whole range of reactions
ranging from absolutely sincere to a lack of understanding as
to the facts, a lack of understanding as to the legal
standards, and some people whose motives I must say I don't
trust entirely.
Chairman McHenry. Finally--thanks for the Chair's
indulgence--knowing that you were subject to a clawback,
knowing that if you knew just that fact, would you have recused
yourself?
Mr. Becker. If you mean subject to a clawback that I was--
that someone was going to institute an action against me, I do
believe I would have recused myself.
Chairman McHenry. Okay. Thank you.
Chairman Neugebauer. I thank the gentleman. The gentleman
from New York, Mr. Ackerman.
Mr. Ackerman. You were in the agency previously?
Mr. Becker. Yes.
Mr. Ackerman. You left?
Mr. Becker. Yes.
Mr. Ackerman. You went into the private sector?
Mr. Becker. Yes.
Mr. Ackerman. You were earning a lot of money. Why did you
come back?
Mr. Becker. It is sort of hard to answer that in a non-
self-serving way. I came back because Mary Shapiro asked me to,
because I care a lot about what the agency does, because I saw
Madoff--Madoff was a kick in the gut to the agency. I
represented clients before the agency for a long time, and I
thought the agency needed to look at things differently and do
things differently. And I thought it was my duty to do it. Mary
called me up and her words were, David, your country needs you.
How do you refuse that?
Mr. Ackerman. You came back because it was a challenge?
Mr. Becker. That, too.
Mr. Ackerman. You came back because your talents were
needed?
Mr. Becker. I was flattered into believing that, yes.
Mr. Ackerman. If you would have recused yourself, you would
have taken yourself out of the action and your ability to help,
which is the reason you came back, evidently?
Mr. Becker. I think that is correct, yes.
Mr. Ackerman. In your exuberance to do that, do you think
that colored your view as to whether or not you should have
recused yourself?
Mr. Becker. That is why I didn't rely on my view. That is
why I basically had someone else make the decision. Because I
truly believe when it comes to one's own conduct, no one is a
very good judge.
Mr. Ackerman. The fact that you stood to gain even what to
you might be a small amount didn't color your view to make that
decision to go with constant dollars or the cost of money, or
however you want to phrase it?
Mr. Becker. I can honestly say I did not give that a
thought.
Mr. Ackerman. Why did you decide that constant dollars was
the best of the various proposals? In support of that, you
wrote an amicus, submitted it to the court, supporting that
position. Why did you think that was the best way to go?
Mr. Becker. Our attitude, frankly, was to find theories
that would enable us to get as much money as possible within
the law to victims. And we sort of bumped around into other
things--among other things and we came up with something. We
came up with constant dollar, and the more I thought about it,
the more I became convinced that where I had judged I would say
that is the right interpretation of the law. So I said, let's
go with it.
Mr. Ackerman. I will reveal to you that I am among a group
of people and the main sponsor of legislation because I came to
the same conclusion you did and thought that would help the
greatest number of people who were Madoff victims and have
introduced legislation to use constant dollar. So I have now
laid that on the table and revealed it.
If I now said to you that I discovered that I have a Madoff
account, what do you think I should do? I just made that up, by
the way.
Mr. Becker. Yes. I think it is time to sell it. I don't
know.
Mr. Ackerman. I made the second part up. The first part is
true. My question is, is it easier to see it on me than it is
on yourself?
Mr. Becker. I think that is a fair question, and this is a
part of the country in which one's motives are constantly
questioned, and as I said, I did not see this coming, and if I
had, it might well have affected my judgment.
Mr. Ackerman. Nobody asked me but I will tell you what I
think. I think you got blindsided slightly while trying to do
the right thing and are paying a personal price for it, and
that is politics and it happens here very often. But if I am a
judge--and I am not and I hope you don't have to have a real
one give you a determination--but it seems to me that you acted
on the best of instincts in exercising judgment that some
people may want to question for political reasons and for
judgmental reasons and appropriate reasons as well, but if it
means anything--and it certainly doesn't in a court of law--but
I think your dad would be proud of you.
Mr. Becker. Thank you very much. That is a very kind thing
to say.
Chairman Neugebauer. I thank the gentleman, and now
Chairman McHenry.
Chairman McHenry. Thank you. I just have a few questions.
Commissioner Nazareth was mentioned earlier in the testimony
and early in questioning, and I just wanted to ask you about
this because former SEC Commissioner Annette Nazareth told the
Inspector General that she knew that you had received proceeds
of your late mother's Madoff account; is that true?
Mr. Becker. She says it; it must be true. I have no
recollection of that, but she is a completely honest woman.
Chairman McHenry. Did you discuss your mother's Madoff
accounts with Commissioner Nazareth?
Mr. Becker. As I say, she--if she says so, it must be true.
I don't have any recollection of it.
Chairman McHenry. Okay. And so by your own omission,
according to the SEC's Inspector General's report, that is what
she said. So when she is an attorney and these other lawyers
wrote in May of 2009, looking through the typical
correspondence with SEC, it was a little odd that it was
directed to you as the General Counsel rather than the Chairman
or the board but--
Mr. Becker. No, not at all. It is asking for the SEC to
take a certain position in court, and so I would be the one who
got that.
Chairman McHenry. Oh, okay. Then I will accept what you are
saying, but they asked for a particular intervention on the
Madoff's trustee's choice of an account evaluation, the last
account statement method, didn't she, if you recall?
Mr. Becker. I believe so, yes.
Chairman McHenry. Okay. So isn't--did you consider your--
the account you are an heir to in light of this, did this enter
into your thought process when you were considering this?
Mr. Becker. First of all, I wasn't the heir to an account.
I got a check--I got a check that included--
Chairman McHenry. You were the heir to the proceeds of the
account. I am so sorry, but it is a big difference.
Mr. Becker. And I got a check and the proceeds of that--and
that check included money that apparently came from an account
that I didn't know anything about. That letter was what led me
to consult with the Ethics Office. So, yes, I did consider
that.
Chairman McHenry. Okay. So you consulted in May of 2009
with the Ethics Office?
Mr. Becker. I consulted twice. I consulted at or about the
time I came and on this particular matter in May.
Chairman McHenry. Okay. And they cleared you again?
Mr. Becker. Yes.
Chairman McHenry. Okay. So did you consider--so obviously--
so you considered that this could have an effect on you at that
point or potentially?
Mr. Becker. I considered, as my email says, that it was
conceivable that it could have an effect.
Chairman McHenry. Okay. So why didn't you recuse yourself
at that point?
Mr. Becker. Because there are all sorts of things that are
conceivable, and it is all about probability, and based--I did
not know facts. I basically put all the facts in front of the
Ethics Office, said here is what I know, advise me as to
whether this falls within the relevant statute and rule, and I
was told, no, it doesn't.
Chairman McHenry. Okay. And you said that you--that certain
items about this, about the proceeds of this account which you
were the heir of, just to say it correctly, that you didn't
know it was knowable to have this information about the
account?
Mr. Becker. Correct.
Chairman McHenry. Why not in May when this came up and you
went back to the Ethics Office did you ask further questions of
your brother, executor of the estate?
Mr. Becker. I don't remember what I asked my brother and
whether I did or I didn't. I now know for certain that he did
not know and simply did not have the information as--when the
account was opened and how much was put into the account. So
that information just wasn't available.
Chairman McHenry. In terms of estate tax, that wasn't
important information?
Mr. Becker. No. Estate tax isn't based on the gain during
the lifetime of the decedent. It values the assets as of the
time of death. So it was not relevant at all.
Chairman McHenry. Okay. Do you think it was troubling,
though, that Commissioner Nazareth, knowing that you had
received these proceeds of a Madoff account, that you could be
subject to this clawback, do you think that was--and actually
taking official action, do you think that is questionable?
Mr. Becker. I think you are attributing a lot of knowledge
to me and all knowledge that I had to Commissioner Nazareth,
and I doubt that was the case. I am a professional.
Commissioner Nazareth is a professional. We represent clients,
and we advocate the views of clients, and had she thought about
it, I am sure she would have thought that recusal or not was
between me and the Ethics Office. I don't know that she thought
about it.
Chairman McHenry. Okay. Professionals make mistakes.
Mr. Becker. Yes, they do, and thank God for that or I
wouldn't have a living.
Chairman McHenry. That is correct. But knowing what you
know now, you would have recused yourself, wouldn't you?
Mr. Becker. No--you say knowing what I know now, if I knew
that I was going to be sued, sure.
Chairman McHenry. You are testifying before Congress
because of this appearance of impropriety. You have an
Inspector General's report that has been referred to the
Justice Department because of this. You have been sued. You
would recuse--if you were able to rewind the tape, would you
have recused yourself?
Mr. Becker. I would have recused myself if I knew I was
going to be sued for legal reasons. The fact that Inspector
General Kotz is making a big fuss about having sent something
to the Justice Department doesn't move the needle as far as I
am concerned. I have seen Inspector General Kotz do this
before, make a big fuss, lots of publicity about sending
reports to the Justice Department. Nothing has happened with
any of them, and some of them that I recall from my time at the
SEC were laughable.
Chairman McHenry. Is this laughable?
Mr. Becker. They say comedy is what happens to someone else
and tragedy is what happens to you. So this is a tragedy.
Chairman McHenry. Should I review it as a comedy?
Mr. Becker. I think you should review this as someone who
shoots straight, did what he was supposed to do, and is not
deserving of the type of public criticism that he has gotten.
That is how I think you ought to look at this.
Chairman McHenry. Thank you.
Chairman Neugebauer. I thank the gentleman. I also want to
thank the gentleman for having the joint hearing with us. I
think it has been a very good day. We have had a lot of good
testimony. Mr. Becker, we appreciate you coming.
Mr. Becker. My pleasure.
Chairman Neugebauer. And for giving us your time. The Chair
notes that members may have additional questions for this panel
which they may wish to submit in writing. Without objection,
the hearing record will remain open for 30 days for members to
submit written questions to these witnesses and to place their
responses in the record, and Mr. Capuano, thank you.
This hearing is adjourned.
[Whereupon, at 6:53 p.m., the hearing was adjourned.]
A P P E N D I X
September 22, 2011
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