6/3/13:  In a case that should be of interest to SEC investigators, an independent federal arbitrator last week reversed a 2011 discipline imposed by SEC Chairman Mary Schapiro against an SEC non-management attorney for the handling of a minor anonymous tip concerning Bernard Madoff. The arbitrator’s decision sustained the grievance filed by NTEU on behalf of the attorney. The arbitrator reversed a 3-day suspension without pay as well as all resulting adverse impacts against the attorney, finding that the SEC had violated Section 34 of the Union’s Collective Bargaining Agreement by improperly disciplining the employee for purportedly violating a mandatory policy that the arbitrator found did not exist at the time of the conduct in question.

This case stretches back to the Bernard Madoff scandal. In 2009, in the wake of the revelation that the SEC had failed to uncover the Madoff fraud, the SEC’s Office of the Inspector General (“OIG”) conducted a far-ranging investigation of the SEC’s handling of Madoff investigations and examinations. Under the leadership of erstwhile IG David Kotz, the OIG looked into numerous allegations that the SEC had received over the years about Madoff’s illegal activity going back to 1999. The OIG issued a report of investigation on August 31, 2009.

The OIG’s report found that there were “systemic breakdowns” in the way that the SEC had handled examinations and investigations related to Madoff. As part of that report, the OIG recommended that the SEC Chairman and management review portions of the report related to “performance failures of employees who still work at the SEC, so that appropriate action … is taken on an employee-by-employee basis…”

In October 2009, the SEC retained an outside firm to review these issues and advise it on possible disciplinary responses that might be warranted. In that report, the outside firm concluded that the Grievant had “failed to exercise reasonable care” in handling a November 2006 anonymous complaint about Madoff. The firm recommended a 7-day suspension. After the Grievant submitted oral and written replies to the notice of proposed 7- day suspension, former SEC Chairman Mary Schapiro reduced it to a 3-day suspension without pay against the Grievant. To the knowledge of the Union, this was the only discipline imposed against a non-management employee in connection with the Madoff case.

The 2006 anonymous complaint received by the Grievant stated simply:

Dear SEC,

While I have no specific information/evidence of wrongdoing, I would be interested if I were you in investigating the combined activities of Benard L. Madoff Investment Securities LLC (money manager and market maker) and the hedge funds managed by Fairfield Greewich Group. No down months and low volatility all the time just doesn’t add up.

Concerned Citizen

The gravamen of the disciplinary charge against the Grievant was that he decided to close out this anonymous tip without first running an internal SEC database search to determine if there was an active investigation of Madoff. The Grievant’s closure of the matter was, however, approved by the Grievant’s Branch Chief.  The arbitrator found the Grievant’ s decision to conduct a database search was entirely discretionary under SEC practices at that time, based upon factors such as whether the tip was anonymous, and whether it contained any specific allegations of wrongdoing. Due to the lack of specific information in the anonymous tip, the Grievant exercised the judgment not to conduct a search.

Despite the fact that there was no mandatory policy at the SEC during the time frame in question that required a database search, OIEA Director Lori Schock and OIEA managers Al Lapins and Gloria Smith-Hill nevertheless all contended in testimony at the arbitration hearing that an SEC database search was required with respect to each and every one of the thousands of anonymous tips and complaints received by the agency every year. Another OIEA Branch Chief, however, as well as several other OIEA attorneys and specialists who appeared at the hearing, all consistently testified that such a database search was not mandatory, but could be conducted at the discretion of the person processing the complaint.

According to the arbitrator’s decision, the Branch Chief “convincingly stated that in 2006 there was no mandatory requirement to do a [database] search.” The arbitrator also concluded that “the testimony of the [other] OIEA managers, though, is not persuasive.” Instead, “[t]he undisputed facts demonstrate that in 2006, OIEA had no formal, written policies on how staff were to process complaints.” Furthermore, the arbitrator found that the anonymous tip itself was so non-specific in its allegations that it could not support the agency’s claim that the Grievant “failed to exercise due care” in processing it.

“NTEU is pleased that we were finally able to clear this employee’s name and record at the SEC,” NTEU Chapter 293 President Greg Gilman stated earlier today. “The Union believes that it is simply wrong to punish an employee for making a discretionary, triage decision in the course of his or her duties – the type of decision that most SEC employees are required to make every day – in reliance upon a post-hoc policy that was not even in place when the decision was made.”