Sen. Grassley: SEC may have covered up bank wrongdoings

WASHINGTON — A US senator said Wednesday that the Securities and Exchange Commission may have destroyed thousands of documents related to probes into possible violations by major banks and hedge funds.

Senior Republican Senator Chuck Grassley said that "an agency whistle-blower" sent him a letter that described the SEC's allegedly unlawful destruction of records related to more than 9,000 informal investigations.

The documents included cases arising from the 2008-2009 financial crisis, including Goldman Sachs, AIG, and the Bernard Madoff pyramid fund, according to the whistle-blower, Grassley said.

The whistle-blower, 13-year SEC lawyer Darcy Flynn, said the destroyed records related to "matters under inquiry" or MUIs -- probes that precede the launch of formal investigations.

"From what I've seen, it looks as if the SEC might have sanctioned some level of case-related document destruction," Grassley said in a statement.

"It doesn't make sense that an agency responsible for investigations would want to get rid of potential evidence."

According to a letter from Grassley to SEC chairwoman Mary Schapiro, Flynn said some of the destroyed documents related to Goldman Sachs, Wells Fargo, Bank of America, Deutsche Bank, Lehman Brothers, and SAC Capital -- many of which played a major role in the 2008 crisis -- as well as Madoff, jailed for the biggest financial scam in US history.

The destruction of such documents "would appear to greatly handicap the SEC's ability to create patterns in complex cases and calls into question the SEC's ability to properly retain and catalog documents," Grassley said.

An article published online Wednesday by Rolling Stone magazine said Flynn had presented his evidence of document destruction dating as far back as 1993 to three congressional committees in recent months.

The magazine suggested that the document destruction helped cover up wrongdoing in the securities and banking industries.

Flynn "paints a startling picture of a federal police force that has effectively been conquered by the financial criminals it is charged with investigating," Rolling Stone said.

"In at least one case, according to Flynn, investigators at the SEC found their desire to investigate an influential bank thwarted by senior officials in the enforcement division -- whose director turned around and accepted a lucrative job from the very same bank."

SEC spokesman John Nester declined to comment on the letter, but said that "as a general matter... there's no requirement that every document obtained by an agency in the course of its work be retained."

"If it's a document we obtain in the course of an investigation, we retain those documents for 25 years, but for a MUI that doesn't become an investigation, we maintain a record of that," he said.

Such a document could then be re-obtained from the original source if necessary, he added.