March 5, 2021

File Disposal Still an Issue for S.E.C.

That has worried Paul M. Wester Jr., chief records officer at the National Archives and Records Administration, who has written three letters to the S.E.C. since July 2010 on the matter. His concern was repeated Thursday in a statement by the archives.

In the absence of an approved plan to retain records, Mr. Wester wrote in one of the letters, the agency “remains concerned” that the records “remain at risk,” despite an S.E.C. guarantee that it has been keeping those documents since the disposal policy came to light last year.

The S.E.C. “did not have authority to dispose of” the records, said the statement issued Thursday. The archives is continuing “to work with the S.E.C. to prevent future unauthorized destruction” of investigation files.

The records at issue involved preliminary inquiries, known as matters under investigation or M.U.I.’s, which are inquiries that the S.E.C.’s enforcement staff decided not to elevate to full investigations. Typically, these files include “correspondence, interagency memoranda or other documents supporting a decision not to open a formal investigation,” according to an S.E.C. letter from last year.

“While the National Archives is satisfied that the destruction has stopped, N.A.R.A. remains concerned that the S.E.C. has been slow in creating records schedules for review and approval by the Archivist of the United States that will ultimately determine how long these M.U.I. records need to be maintained,” the archives’ statement said.

John Nester, an S.E.C. spokesman, confirmed that the agency was working with the archives to agree on a policy on file retention. “You have to be thorough and deliberative,” he said.

“We maintain records of our inquiries and they are available to investigators across the agency,” Mr. Nester said in a separate statement. “As N.A.R.A. notes, it works with federal agencies on a regular basis to resolve allegations and we are committed to that process.”

The S.E.C.’s policy had long been to dispose of documents related to a preliminary investigation if the agency’s enforcement division decided to close the inquiry. If the S.E.C. decided to upgrade an inquiry to a full investigation, all records from both the preliminary and the formal investigation were retained.

The policy to dispose of documents was almost unknown outside the S.E.C. until last year, when Darcy Flynn, an employee for 13 years in the S.E.C.’s enforcement division, took the information to the National Archives, which began an investigation in July 2010.

Six months earlier, Mr. Flynn began a job helping to manage records disposition for the enforcement division, and he determined that the policy appeared to violate federal law.

In a letter documenting Mr. Flynn’s charges, written by his lawyer, Gary J. Aguirre, he maintains that at least 9,000 case files were destroyed over the last two decades.

Two months ago, unsatisfied with the S.E.C.’s response to the National Archives investigation, Mr. Flynn hired Mr. Aguirre, of San Diego. Last month, he told his story to investigators for the Senate Judiciary Committee, which has opened an inquiry.

It is not clear exactly how the document disposal policy came into practice. The S.E.C.’s formal policy guide to records retention, dated September 1997, contains no reference to files on preliminary inquiries at all, much less when they should be retained or destroyed.

Mr. Nester, the S.E.C. spokesman, said that the policy of how to dispose of a case dates to at least 1992. At about that time, the enforcement division issued guidelines that documents related to preliminary inquiries should be disposed of if a file was closed without being upgraded to a formal investigation. A new tracking system installed about five years ago allowed the agency to keep more information about cases even after they were closed, he said.

The document disposal is a concern, however, because it “would appear to greatly handicap the S.E.C.’s ability to create patterns in complex cases,” Senator Charles E. Grassley, an Iowa Republican who is the ranking member of the Senate Judiciary Committee, said in a letter to the S.E.C. chairwoman, Mary L. Schapiro.

“It doesn’t make sense that an agency responsible for investigations would want to get rid of potential evidence,” Senator Grassley said in a separate statement.

Mr. Flynn, the whistle-blower, who continues to work at the S.E.C., declined an interview request through his lawyer. The lawyer, Mr. Aguirre, has significant experience with whistle-blower cases.

A former staff lawyer at the agency, Mr. Aguirre was fired in 2005 during an insider-trading investigation involving a prominent hedge fund. After filing a whistle-blower wrongful termination lawsuit, he received a $755,000 settlement from the S.E.C. in June 2010.

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