[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




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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

                              ----------                              
                                                                   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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