SEC leased unneeded space in D.C., watchdog report says

May 24, 2011

The Securities and Exchange Commission “grossly overestimated” the amount of office space it needed and might have violated federal law when it signed a $556.8 million, 10-year lease last year in downtown Washington, the agency’s inspector general said in a report Tuesday.

The SEC leased the space before Congress had approved funding for the big staff increase the agency was anticipating, and the SEC used “a deeply flawed and unsound process” to justify the deal, the report said.

The lease was not awarded competitively, and a document formally justifying it was prepared a month after the SEC had signed the contract, the report said. The document was backdated to give the impression that it was written just a few days after the lease was signed, the report said.

In an interview with the inspector general’s office, an unnamed SEC employee — one of many whose names were redacted in the report — said one of the assumptions the agency used was merely a “WAG”— a “wild-ass guess,” the report said.

The report gives fresh ammunition to the SEC’s critics at a time when the agency is already on the defensive. The SEC has been fighting for a budget increase and meeting resistance from some congressional Republicans who say the agency has been so badly mismanaged that it does not deserve the money.

The inspector general’s report focuses on a lease for Constitution Center, an office building in Southwest D.C. that formerly housed the Department of Transportation and had recently undergone an extensive renovation.

The SEC signed a deal for 900,000 square feet in July 2010, expecting that it would be adding 800 employees to handle its expanded responsibilities under the law Congress passed to overhaul the regulation of Wall Street.

The Dodd-Frank Act, which was meant to respond to the mortgage meltdown and financial crisis, authorized but did not guarantee a budget increase for the agency. The funding did not materialize.

The SEC relinquished about 600,000 square feet to the landlord for other tenants, but it is still responsible for other space being readied for occupancy next year.

In March, the SEC told private landlord David Nassif Associates that it was trying to sublease 342,000 square feet covered by its lease but had not succeeded in finding a tenant, the report said.

The landlord has asserted that the SEC owes it $94 million in damages, but the SEC denies that any damages are owed, the report says. The alleged damages include brokerage commissions the landlord incurred, borrowing costs and expenses for finishing space the SEC never occupied.

“We are currently reviewing the Inspector General’s report about the way in which the leasing process for Constitution Center was handled,” SEC spokesman John Nester said in a statement.

The SEC is “moving forward to implement” the inspector general’s recommendations, Nester said.

Those include considering disciplinary action against SEC officials, “up to and including dismissal,” the report said.

Another SEC employee testified that management in the agency’s Office of Administrative Services had “grandiose plans” and “was significantly influenced by the upscale nature” of Constitution Center, the report said.

The building features limestone floors, marble walls, and a landscaped courtyard, the report said. “The facility promised abundant daylighting, panoramic views of the city and surrounding region and an open plaza . . . that had been transformed into a one acre private garden,” the report said.

Even assuming the agency would have the money to add 800 employees, the estimates of how much space it would need were “wildly inflated,” the report said.

The handling of the lease “represents another in a long history of missteps and misguided leasing decisions by the agency,” the report said.

For example, the report said, the SEC disclosed in 2005 that it had found about $48 million of unbudgeted costs associated with construction of its headquarters next to Union Station.

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