September 20, 2011 8:04 PM

SEC Report Refers Ex-GC Becker, a Cleary Partner, to DOJ for Possible Probe

Posted by Brian Baxter

UPDATE: 9/23/11, 11:15 a.m., EDT. David Becker testified before a House subcommittee on Thursday, according to sibling publication Corporate Counsel.

In a report released Tuesday, the Securities and Exchange Commission's inspector general referred a case involving former SEC general counsel David Becker—now a Cleary Gottlieb Steen & Hamilton partner—to the U.S. Department of Justice to investigate whether Becker should face prosecution for violating federal conflict of interest laws.

While the Justice Department is not bound to open a case of its own against Becker based on the inspector general's referral, the possibility that the SEC's former top lawyer could be hit with federal criminal charges is a major development in and of itself.

In his 119-page report, "Investigation of Conflict of Interest Arising from Former General Counsel's Participation in Madoff-Related Matters," SEC inspector general H. David Kotz states that Becker oversaw the agency's efforts to address the fallout from Bernard Madoff's $20 billion Ponzi scheme at the same time that Becker and members of his family had a personal financial stake in the matter.

Becker, who did not immediately respond to a request for comment, joined Cleary in May as a partner in Washington, D.C., after spending about two years at the SEC. Kotz's report states that when Becker announced his departure from the SEC on February 1, he was unaware that he would be hit a few weeks later with a clawback suit filed by Baker & Hostetler partner Irving Picard, who is serving as liquidating trustee for the bankrupt estate of Bernard L. Madoff Investment Securities (BLMIS).

In that suit, Picard alleges that Becker and two brothers received nearly $2 million in ill-gotten Madoff-related gains from the estate of their mother, who had invested with BLMIS. Becker and his brothers inherited the money from an account that was liquidated after their mother's death in 2004.

Becker's work at the SEC, which he joined in February 2009 after a previous stint at Cleary, required him to be the agency's senior policy director. Among his responsibilities: making determinations about how much money Madoff victims were entitled to recover in compensation for their losses.

When Becker announced he would leave the SEC in February, he was replaced by SEC deputy general counsel Mark Cahn, a former Wilmer Cutler Pickering Hale and Dorr partner. Becker and SEC chair Mary Schapiro were subsequently called to testify before a House oversight panel investigating the conflict of interest issue.

While Schapiro testified before the committee earlier this year, Becker declined to do so. Both are now scheduled to appear, along with Kotz, at a second congressional hearing set for Thursday. (Sibling publication Corporate Counsel has more on the allegations against Becker, who spoke with the magazine earlier this year about the Madoff matter and his time at the SEC.)

Kotz, who did not respond to a request for comment, states in his report that the Office of the Inspector General's "extensive investigation" included obtaining and searching more than 5.1 million e-mails for 45 current and former SEC employees covering the years 1998 to 2011. According to the report, the Office of the Inspector General (OIG) obtained additional documents from Picard.

The OIG's report states that Schapiro told Kotz and other investigators that she would not have had Becker work on Madoff-related policy matters if she had known he could be sued by the trustee or had a financial interest in the outcome of the trustee's actions.

In a statement on Kotz's report released Tuesday, Schapiro said that she authorized the OIG to look into the matter, but declined further comment given the inspector general's decision to refer it to the Justice Department.

"I take [Kotz's] report . . . very seriously," Schapiro added. "I do want to state that I've known David for many years to be a talented, highly skilled lawyer and a dedicated civil servant who served under three chairmen."

In referring Becker for possible criminal prosecution, Kotz underscores Becker's key role in determining the SEC's method for compensating Madoff victims and notes that "matters on which he advised could have directly impacted his financial position."

Becker, who previously served as general counsel at the SEC from 2000 to 2002, has retained Latham & Watkins partner William Baker III to represent him. In a statement to The Am Law Daily, Baker maintained that Kotz's report highlights several facts that are favorable to his client.

Baker pointed specifically to the section of the report that indicates Becker "notified at least seven senior officials at the [SEC] about the fact of his later mother's account at [BLMIS], including the Chairman of the SEC, the Designated Agency Ethics Officer, the Director of the Office of Legislative Affairs, the Deputy General Counsel, the Deputy Solicitor, a Senior Counsel in the Ethics Office, and a Senior Counsel to the Chairman."

Kotz further states in the report that none of these officials recognized a conflict or took any action that caused Becker to recuse himself from the liquidation of BLMIS. Baker also noted that Kotz's report states that Becker himself was the first to raise the potential conflicts issue and sought legal advice from SEC ethics officials on the matter.

"Nevertheless, the [OIG]'s report contains a number of critical factual and legal errors that lead to erroneous conclusions," Baker said in his statement. "Unfortunately, we were not provided with an opportunity to review the report and correct the record prior to its release. Mr. Becker looks forward to testifying before Congress."

A Cleary spokeswoman declined to comment on Kotz's findings when contacted by The Am Law Daily  Tuesday. Several D.C.-based partners at Am Law 100 firms, requesting anonymity in order to speak freely, expressed surprise at Kotz's decision to refer the case to the public integrity section at Main Justice.

"There's some indication [Becker] raised the [conflicts] issue himself and sought some kind of clearance," one partner said in response to Kotz's report. "I'm a bit shocked they came down this hard on him," said another.

Kotz's report also criticizes former SEC ethics counsel William Lenox, who reported to Becker and consulted with him at least twice on potential conflict of interest issues. Kotz states that "just seven months after Lenox provided advice regarding Becker's participation in the Madoff Liquidiation, Becker provided a performance evaluation of Lenox, which concluded, 'The performance of the ethics office has been superb . . . . The quality of the ethics advice is very high."

Lenox has reportedly retained the pro bono services of Harvey Pitt, a one-time SEC chairman and former senior partner at Fried, Frank, Harris, Shriver & Jacobson. Pitt now serves as CEO of D.C.-based consulting firm Kalorama Partners, according to our previous reports. Kotz suggests in his report that in the future, the SEC's ethics counsel should report to the commission's chair instead rather than its general counsel.

Kotz also recommends reopening voting on the SEC's valuation of claims by Madoff victims in order to free the agency of accusations of bias fed by Becker's involvement in the process. Responding to that recommendation, the SEC said Tuesday it would reopen voting on the commission's position on how to value Madoff victim accounts.

"I believe that the decision the commission made on that issue was appropriate under the law and in the best interests of investors," Schapiro said in her statement. "Moving forward, we plan to implement the other recommendations contained in the report as well."

It is unclear what impact a change in the SEC's views would have on the BLMIS bankruptcy proceedings. The U.S. Court of Appeals for the Second Circuit has already ruled that Picard could reject claims by "net winners" who took out more money than they put into the Ponzi scheme rather than go off the customers' last statements.

The SEC has backed Picard and the Securities Investor Protection Corporation (SIPC) on that issue. As to the still-open question of how to apply the time-value of money—whether to adjust the losses based on the potential returns they lost by not investing the money somewhere else—the SEC stood apart from both Picard and SIPC.

Milberg bankruptcy partner Jonathan Landers, who represents some Madoff customers, says that "at the present time that issue has not been determined so there's nothing on the table to change."

Additional reporting by Nate Raymond.

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