H. David Kotz

H. David Kotz, also known as Harold David Kotz, (born June 24, 1966, in Toronto, Canada) is a director in the Financial Institutions practice at Berkeley Research Group.^[1][2]

Kotz was a litigation associate at three law firms from 1990–99, and then a labor attorney at the U.S. Agency for International Development from 1999–2002. He worked at the Peace Corps as a lawyer handling labor and violent crime matters, as well as Inspector General, from 2002–07.

He then was Inspector General at the U.S. Securities and Exchange Commission (SEC) from December 2007 until January 2012, when he resigned in the midst of questions about his tactics and conduct.^[3][4][5][6] At the SEC, his department conducted investigations about improprieties, conflicts of interest, and the SEC's failure to uncover Ponzi schemes. He referred 30 cases to the Justice Department; 2 were prosecuted, leading to 1 conviction. In 2012, an independent review of his conduct by the Inspector General of the U.S. Postal Service concluded that Kotz violated ethics rules by overseeing probes that involved people with whom he had conflicts of interest, due to personal relationships.^[7][8]

In 2012, an independent review of his conduct by the Inspector General of the U.S. Postal Service concluded that Kotz violated ethics rules by overseeing probes that involved people with whom he had conflicts of interest.^[7][8] One conflict involved Kotz accepting three tickets to a Philadelphia Eagles game at a subsidized cost from a financial adviser. ^[9]

Education

Kotz graduated cum laude from the University of Maryland, College Park in 1987, with a B.A. in Government and Politics, and earned his J.D. at Cornell Law School in 1990.^[10]

Law firms (1990–99)

In his early career, Kotz worked as a litigation associate at three law firms, working on commercial litigation, discrimination, personal injury, and sexual harassment matters: Graham & James (1990–92) and Stults & Balber (1992–94) in New York City, and Pepper Hamilton LLP (1994–99) in Washington, DC.^{[11][12][13][14]}

US Agency for International Development (1999–2002)

Kotz worked at the US Agency for International Development (USAID) from 1999–2002, where he was an Attorney Advisor in the Office of the General Counsel and later a Chief in the Office of Labor and Employee Relations.^[10][14][15]

Peace Corps (2002–07)

Kotz joined the Peace Corps in 2002, and worked there until 2007, during which time he handled labor arbitrations, employee grievances, and prosecutions of rapes, sexual assaults, and other violent crimes against volunteers.^[13][16] For three years, he was an Associate General Counsel.^[10] Starting in 2006, he worked for the Peace Corps as Inspector General.^[10]

SEC (2007–12)

In December 2007, Kotz next became the Inspector General at the Securities and Exchange Commission (SEC), following the resignation of his predecessor, Walter Stachnik, who stepped down after a Senate report criticized his performance.^[6][17] At the time, he had little expertise in securities law, but he was quickly pushed into the spotlight.^[18] He was tasked with conducting independent and objective audits, investigations and inspections to detect waste, fraud and abuse, and promote economy, effectiveness, and efficiency, and his reports touched on the SEC not uncovering the Madoff Ponzi scheme and the SEC's office-leasing program after the Dodd-Frank financial overhaul.^[10][19]

Kotz's tenure at the SEC was contentious and controversial, marked by critical investigations, charges that some of his investigations lacked evidence of wrongdoing and distorted facts to build a case, criticisms of him for conflicts of interest and ethics violations, and a determination that he had an inappropriate relationship with an SEC employee.^[20][21] According to his reports, he referred about 30 cases to the Justice Department, of which 2 were prosecuted, leading to 1 conviction, as of September 2011.^[22] Mary Schapiro, Chairman of the SEC, in her announcement of his departure from the SEC praised Kotz as a "committed public servant who has served the agency with great distinction."^[19][20][23]

Investigations

Madoff

Kotz investigated why the SEC failed to detect the $19 billion Madoff fraud, despite its responsibility to regulate Madoff's firm.^[6] Madoff pleaded guilty to fraud and is now serving a 150-year sentence.^[24] He also investigated the responses by the SEC to written complaints about Madoff since 1992.^[24] In September 2009, Kotz issued a 477-page report that described numerous failures on the part of the SEC in failing to uncover Madoff's Ponzi scheme, and concluded that the SEC had many opportunities to spot the Ponzi scheme but failed to do so, despite three examinations and two investigations, which even surprised Madoff himself.^{[6][24][25][26]} Kotz followed that up with recommendations to fix the problems that he believed contributed to the SEC's failures, including how the SEC should evaluate and follow up on tips, train investigators, document examinations of securities firms, and improve working relationships at the SEC.^[27] Speaking of the Madoff victims, Kotz observed: "People’s lives are destroyed, but they can find some solace in knowing there was change as a result."^[28]

One of his findings in his Madoff-related investigations was that after the scheme was uncovered, David M. Becker, the SEC’s General Counsel, recommended how the victims would be compensated, despite the fact that Becker's family had a $2 million inheritance in a Madoff account.^[29] Kotz referred the matter to the U.S. Justice Department's criminal division.^[29] Becker indicated that he had notified seven senior SEC officials about the account, including the Chairman, and the SEC's ethics counsel advised him twice that he had no conflict, and none suggested that he recuse himself.^[29][30] Becker said:

I have seen Inspector General Kotz do this before, make a big fuss... about sending reports to the Justice Department. Nothing has happened in any of them, and some of them ... from my time at the SEC were laughable.^[30]

The Justice Department declined to pursue the matter.^[31][32]

He also investigated whether the romantic relationship between Eric Swanson, the SEC Assistant Director of the Office of Compliance Inspections and Examinations, and Bernie Madoff's niece and in-house compliance attorney Shana Madoff, whom Swanson met in 2003 while he was investigating her uncle Bernie and his firm for running a Ponzi scheme, influenced the SEC's closing of the Madoff investigation. Swanson left the SEC in 2006, became engaged to Shana Madoff three months later, and married her in 2007. Kotz concluded that there was no evidence that their relationship influenced the SEC's closing of the inquiry.^[33][34]

Financial analyst and whistleblower Harry Markopolos said that Kotz "was unflagging [and h]e restored my faith," in the Madoff affair.^[35] Subsequently, a 66-page report resulting from an investigation prompted by complaints about Kotz having a conflict of interest in the Madoff matter questioned Kotz’s work on the Madoff investigation, because Kotz was a "very good friend" with Markopolos.^{[8][21][36][37]} It concluded that while it was unclear when Kotz and Markopolos became friends, it would have violated U.S. ethics rules if their relationship began before or during Kotz’s Madoff investigation.^[8]

Stanford

In March 2010, Kotz issued another report finding the SEC also failed to uncover a $7 billion Ponzi scheme perpetrated by Allen Stanford.^[21] Kotz found that by 1997 the SEC had suspected that Stanford was running a Ponzi scheme, but it did not stop the scheme until late 2005.^[38] Kotz accused Spencer Barasch of having a conflict of interest, in that he participated in decisions not to investigate Stanford when he was head of enforcement in an SEC regional office, and then briefly representing Stanford before the SEC after leaving the SEC.^[39][40] In 2012, Barasch agreed to pay a $50,000 fine to settle a Justice Department claim that he violated a federal law barring former government officials from appearing in front of U.S. agencies on matters in which they “personally and substantially” participated while in the government’s employ, though he disputed that he acted unethically and said he settled to avoid the expense and uncertainty of long litigation.^[39][40]

A subsequent 66-page report on Kotz's behavior by Inspector General David C. Williams of the U.S. Postal Service found that Kotz himself "appeared to have a conflict of interest" and shouldn’t have opened the investigation, because he was friends with a female attorney who represented victims of the fraud.^[21]

Thomsen/Pequot Capital

Kotz investigated a controversy reported by a former SEC lawyer who claimed he was fired in order to thwart his investigation of insider trading at Pequot Capital Management. Kotz recommended that disciplinary action be commenced against Linda Chatman Thomsen, the Director of the Division of Enforcement for the SEC.^[41] His recommendation was not accepted, and no disciplinary action was taken.^[6]

Goldman Sachs

In 2010, Kotz looked into allegations regarding the timing of an SEC fraud case against Goldman Sachs. Kotz did not find any evidence that SEC officials coordinated the timing of actions against Goldman Sachs with anyone in the Obama administration or Congress, to help speed passage of the financial overhaul law.^[42]

Pornography

In both 2010 and 2011, Kotz investigated the accessing of pornography sites on SEC computers during business hours, finding a number of SEC staff had been visiting such sites.^{[23][43][44][45]} He released two reports, documenting his findings.^[43][44]

SEC office lease

In 2011, Kotz issued a report criticizing the SEC for its 900,000-square-foot, $557 million, 10-year lease for new office space.^[46][47][48] He called the process, which lacked competitive bidding, deeply flawed and unsound.^[47]

Controversy and departure

Employee Complaints

At least two formal complaints were filed against Kotz by SEC staff members (including Linda Baier, acting Branch Chief of Acquisition Policy, and Nancy McGinley, an enforcement attorney, in April 2011), with the Council of Inspectors General on Integrity and Efficiency (CIGIE).^[18][49][50] They alleged that Kotz distorted facts to build a case, and that he created a culture of fear at the SEC of Kotz's "false allegations and retaliations".^[18][49] Kotz sought to have Baier disciplined, but her managers declined to take action.^[18] Kotz similarly sent a criminal referral to federal prosecutors regarding trading by McGinley, but the Justice Department declined to act.^[18] Kotz denied the allegations, but ultimately left the SEC in the midst of a scandal concerning ethics and potential conflicts of interest.^[18][49] On the one hand, Julie Preuitt, an assistant regional director in the SEC's Fort Worth office, said Kotz was "trying to shine a light" on an agency that previously had not received intense scrutiny, but on the other hand current and former SEC staffers and lawyers outside the Commission said Kotz's over-zealous effort to uncover waste, fraud, and abuse at the SEC had gone overboard and had led some talented attorneys to leave the Commission.^[18][49]

Another complainant against Kotz was the office's former Chief of Investigations, David Weber, who accused Kotz of improper conduct in the Madoff investigation.^[7][51] In November 2012, Weber filed a federal lawsuit after he was terminated by the SEC in which he alleged that Kotz unethically conducted personal relationships with colleagues that might have compromised the SEC’s Madoff and Stanford prosecutions.^[52][53] Weber had been on leave since the spring after some employees complained that he was physically threatening and spoke openly about his desire to carry a gun at work. Weber denied those allegations.^[54] An independent, outside review of Weber's charges relating to Kotz's conduct, after Weber was placed on leave, by Inspector General David C. Williams of the U.S. Postal Service did find that Kotz may have had conflicts of interest in a number of important investigations, including relationships with individuals connected to subjects he was investigating, but did not identify instances in which information in any of his reports was compromised.^[55] Kotz responded to the civil lawsuit saying that: "for some inexplicable reason, my name has been dragged through the mud in the most ludicrous and unbelievable allegations."^{[37][51][52][56]} The SEC settled with Weber for $580,000, one of the highest SEC settlements in a whistleblower retaliation case, in May 2013.^[57][58]

Report on improper conduct by Kotz

Because of concerns of improper conduct by Kotz, Inspector General David C. Williams of the U.S. Postal Service was brought in to conduct an independent, outside review of Kotz's alleged improper conduct.^[7] Williams concluded in his Report that Kotz violated ethics rules by overseeing probes that involved people with whom he had conflicts of interest due to “personal relationships.”^[7][8][59] He also concluded that Kotz may have had an inappropriate relationship with an SEC employee.^{[7][36][56][59]} Williams did not identify specific examples of Kotz's reports being tainted.^[60]

One conflict of interest for which Kotz was criticized was his decision to accept club-level tickets from a financial adviser, for himself and his sons, to a sold-out Philadelphia Eagles football game.^{[7][8][52][61]} Kotz reimbursed the financial adviser $95 apiece, for three tickets that the team said had a value of $240 each.^[8] Commenting on the matter, Professor Geoffrey Hazard, a legal ethics specialist, said that “However passionate a fan you might be of the Eagles, it’s just imprudent” to take the tickets.^[61] Kotz called the incident: "an insignificant matter."^[52][56]

The Report questioned Kotz’s work on the Madoff investigation, because Kotz was a "very good friend" with the whistleblower in the case, Harry Markopolos.^[8][36] Although investigators were not able to determine when Kotz and the whistleblower became friends, the Report concluded that it would have violated U.S. ethics rules if their relationship began before or during Kotz’s investigation.^[8][37]

The Report also questioned Kotz's work on the Stanford investigation.^[8] It found that Kotz “appeared to have a conflict of interest” when he opened and supervised the investigation, because of his relationship with a Massachusetts attorney representing Stanford's victims who, one month after starting the investigation, Kotz listed as a business reference and a “personal friend”.^[8][36] Kotz met with her after his departure from the SEC in an effort to seek business for his new job.^[8][56]

The Report also found that Kotz should not have participated in a probe of the re-organization of the SEC’s office, because he engaged in “extensive” and “flirtatious” communications with a female SEC staffer associated with the project during the probe.^[8] Among other things, he emailed her in 2008 a suggestion that she buy a "short skirt or two," and as to the dress code he indicated that she would qualify for a “Special exemption for after work get togethers.”^[8] Kotz said he was communicating with her the way he would talk to any other employee and that he didn’t think any of his communications were inappropriate, and denied having any personal relationship with the woman.^[8][56]

Senator Charles Grassley (R-Iowa) said in a statement that the Report revealed "poor judgment".^[8]

Departure

On January 17, 2012, Kotz resigned amid criticisms of his behavior and questions about his conduct, and the SEC announced that he would leave the agency at the end of January.^[8][19][51] Kotz announced that he was leaving the SEC, describing the reports he had issued as being “significant to the agency, Congress and the investing public.”^[62]

Senator Grassley, an Iowa Republican who was a frequent critic of the SEC, said: “David Kotz produced strong, conclusive reports, even as critics claimed he was too aggressive. An aggressive, independent inspector general is best for the agency in the long run, even if that’s uncomfortable for management.”^[23][63]

Gryphon Strategies (2012)

In late January 2012, Kotz joined Gryphon Strategies, a small New York corporate fraud investigation firm, as its Washington representative and managing director.^[64][65]

Berkeley Research Group (2012–present)

In August 2012, Kotz joined the anti-corruption team as a director in the Financial Institutions practice at Berkeley Research Group.^[66] Kotz had become familiar with Berkeley when he hired the firm while he was at the SEC, during the Madoff investigation.^[64]

Family

Kotz's wife Deborah is a reporter for the Boston Globe.^[67] The couple has three children.^[67]

References