SEC inspector general probing agency's handling of Madoff fraud

By David S. Hilzenrath
Washington Post Staff Writer
Friday, March 4, 2011; 10:31 PM

When an 85-year-old social worker named Dorothy G. Becker died in 2004, her obituary noted her teaching, her dedication to the poor and her passion for painting. There was no sign that the will she left behind would spawn political recriminations and Washington investigations focused on the leadership of the Securities and Exchange Commission.

But included in her estate was a $2 million account with Bernard L. Madoff. And when one of her heirs, her son David, later took a top job at the SEC, he would play a role in addressing Madoff's giant Ponzi scam.

On Friday, the SEC's inspector general said he had opened a probe into whether the SEC had mishandled a potential conflict of interest in responding to the Madoff affair. The action by H. David Kotz came days after congressional Republicans began pressing SEC Chairman Mary Schapiro to account for what she knew and did about the alleged conflicts.

Members of Congress are accusing the SEC of turning a blind eye to potential ethical pitfalls when it allowed David M. Becker to help frame its response to the fallout from the Madoff fraud. The House's most powerful investigator, Rep. Darrell Issa (R-Calif.), has added the issue to his high-stakes agenda.

In a letter Friday to Becker, the lawmakers said, "It is difficult to understand how you and other SEC officials would not realize the strong appearance of impropriety created by your participation in Madoff matters after receiving proceeds from a Madoff account."

The story of Becker's inheritance shows how sparks can unexpectedly ignite into politically charged Washington scandals. It has also prompted questions as to how rigorously the SEC has reformed itself since 2008, when the failure to expose Madoff's Ponzi scheme became a searing humiliation.

For Schapiro, who took office after Madoff was arrested, the concerns about Becker have added an unwelcome challenge at a difficult time. Schapiro has vowed to reform the agency, and she has her hands full putting in place new measures required by the financial reform law enacted by Congress last year.

The Becker matter has given critics of the SEC a new club to bludgeon the agency at a time when Congress is looking to cut the budgets of federal agencies. SEC leaders warn that a lack of funding could compromise the policing of Wall Street.

SEC spokesman John Nester said Schapiro asked the inspector general to review the Becker matter "to ensure an independent gathering and analysis of the relevant facts."

Issa and Sen. Charles E. Grassley (R-Iowa) have given her until 5 p.m. Monday to answer 35 detailed, multiple-part questions about the Becker matter. The interrogatories bear more than a faint echo of the Watergate refrain: What did she know and when did she know it?

For Becker, who is returning to the private sector after ending a second tour of duty at the SEC a week ago, the brouhaha has clouded what might otherwise have been a triumphant exit. He spent his last day as an SEC employee answering questions on Capitol Hill from staff members of Issa's Committee on Oversight and Government Reform and the Senate Judiciary Committee.

Becker first worked at the SEC from 1998 to 2002 as deputy general counsel and then general counsel. He was described by former SEC chairman Arthur Levitt in an interview as "scrupulously honest, sensitive and intelligent . . . a very wise man."

Becker declined to comment on the matter Friday.

After his mother's death, Becker and his two brothers liquidated the Madoff account. Later, in 2008, Madoff's business was exposed as a giant Ponzi scheme.

When Schapiro was tapped by President Obama for the agency's top post, Becker rejoined the SEC as general counsel. Soon after, in May 2009, the SEC was called upon to address questions involving how much Madoff investors were entitled to recoup in the Madoff bankruptcy.

Becker wrote an e-mail to the SEC's internal ethics arbiter, William Lenox, asking what he should do. Becker raised the possibility that a trustee in the Madoff bankruptcy could sue to recover payouts from Madoff accounts. But Becker expressed doubt that he would be sued.

"My instinct is that any claim against me would be much too small and of dubious merit to bring in any event, but I can't say that I'm certain," Becker wrote.

About 25 minutes later, the ethics counsel wrote back, concluding, "You do not have a financial conflict of interest and you may participate."

Recently, as part of far-reaching effort to reclaim money for victims of Madoff's fraud, the trustee, Irving Picard, sued Becker and his brothers, demanding that they repay $1.5 million. The trustee argued that the Beckers were paid with other people's money.

Rep. Gary L. Ackerman (D-N.Y.), who questioned Becker in a telephone coversation a week ago, said that Becker "did what he was supposed to do."

Becker has previously acknowledged that appearances alone can pose a problem.

Last year, when an SEC employee sought Becker's advice about what ethical constraints she might face while moving to a private-sector job, Becker advised her "that for appearance purposes," she should not participate in calls with congressional staff.

That episode was recapped in a recent report by the SEC inspector general, and Grassley cited it in a statement Friday. "There can't be a do as I say, not as I do mentality," Grassley said.

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