Justice considering whether to prosecute SEC on costly office lease

July 6, 2011

The Justice Department is considering whether to prosecute Securities and Exchange Commission employees over the agency’s handling of a $557 million lease for downtown Washington offices that it could not afford and did not need, the agency’s inspector general said Wednesday.

Inspector General H. David Kotz said he recently referred the matter to the Justice Department for potential investigation. The department requested relevant documents, Kotz said.

Kotz said his referral focused on the backdating of a document that was used to justify the lease. Kotz made that disclosure at the end of a House hearing in which lawmakers lambasted SEC Chairman Mary Schapiro over the lease.

In a May report, the inspector general said the SEC entered the lease based on inflated assumptions. After the hearing, Kotz explained by e-mail that he refers matters to the Justice Department “when there is reasonable grounds to believe there has been a violation of Federal criminal law.”

The agency signed the lease last year without competitive bidding, anticipating that Congress would approve funding to cover a major hiring spree after increasing the agency’s responsibilities.

Congress gave the regulatory agency a much larger role as part of legislation responding to the financial crisis, but it did not deliver the expected budget increase.

Rep. Jeff Denham (R-Calif.), chairman of a subcommittee with jurisdiction over public buildings, said he could not understand why the agency committed the government to the 10-year lease in a rush before Congress appropriated the money.

“The agency made a terrible mistake here,” Schapiro testified. “I view myself as being ultimately responsible.”

Denham said he also wanted to know why Schapiro approved the lease in a 10-minute, unscheduled meeting,and he read from testimony in which a former SEC official said he could not recall Schapiro asking any questions at that time.

Denham noted that the plan was at odds with two of Schapiro’s stated objectives: hiring many employees outside the District, in so-called regional offices around the country, and keeping new District offices within walking distance of the agency’s current headquarters near Union Station.

“I assumed that the decision was fully consistent with the wishes that I had expressed,” Schapiro said.

Schapiro said an SEC staff member told her that it was a very good deal and that she had to approve the lease for a building called Constitution Center on an emergency basis because the agency had no other options in the District.

“I’ve never even seen the Constitution Center space,” Schapiro said. “I did not know that they had selected a building that was not within walking distance of the agency. And I certainly didn’t know that my express wish that we move as many employees as possible to the regions was not being honored.”

It was the second episode in recent months in which members of Congress have accused Schapiro of making poor administrative decisions without asking enough questions.

Earlier this year, members of Congress said she mismanaged a conflict of interest in 2009 by allowing a top agency official to participate in SEC policymaking related to the fallout from Bernard Madoff’s Ponzi scheme despite the fact that the official and his brothers had inherited an investment account with Madoff.

The House subcommittee’s Republican majority made its take on the lease decision clear in advance of Wednesday’s hearing, announcing that the subject was “The Securities and Exchange Commission’s $500 Million Fleecing of America.”

The government has found other federal agencies to occupy about two-thirds of the office space, and the agency does not yet owe rent on the remainder, Schapiro said.

In the meantime, lawmakers have proposed taking away the SEC’s authority to lease space for itself. Schapiro said she is arranging to do just that by transferring the job to the General Services Administration, a federal agency that manages property for the government.

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